(SOLVED) LGIN was founded in 2014 to apply a new technology


Question Description:

$19

LGIN was founded in 2014 to apply a new technology for the Internet. The company earned a profit of $190,000 in 2014, its first year of operations. Management expects both sales and net income to more than double in each of the next four years.
Comparative balance sheets at the end of 2014 and 2015, the company’s first two years of operations, appear below.
Additional Information
The following information regarding the company’s operations in 2015 is available in either the company’s income statement or its accounting records:
1. Net income for the year was $562,000. The company has never paid a dividend.
2. Depreciation for the year amounted to $125,000.
3. During the year the company purchased plant assets costing $2,585,000, for which it paid $2,000,000 in cash and financed $585,000 by issuing a long-term note payable. (Much of the cash used in these purchases was provided by short-term borrowing, as described below.)
4. In 2015, LGIN borrowed $1,490,000 against a $4.5 million line of credit with a local bank. In its balance sheet, the resulting obligations are reported as notes payable (short-term).
5. Additional shares of capital stock (no par value) were issued to investors for $665,000 cash.
Instructions
a. Prepare a formal statement of cash flows for 2015, including a supplementary schedule of noncash investing and financing activities.
b. Briefly explain how operating activities can be a net use of cash when the company is operating so profitably.
c. Because of the expected rapid growth, management forecasts that operating activities will include an even greater use of cash in the year 2016 than in 2015. If this forecast is correct, does LGIN appear to be heading toward insolvency? Explain

Answer

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