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Changes: Sources and Uses of Cash

State how each of the following events would affect the firm's balance sheet. State whether each change is a source or use of cash.

a. An automobile manufacturer increases production in response to a forecast increase in demand. Unfortunately, the demand does not increase.

b. Competition forces the firm to give customers more time to pay for their purchases.

c. The firm sells a parcel of land for $100,000. The land was purchased 5 years earlier for $200,000.

d. The firm repurchases its own common stock.

e. The firm pays its quarterly dividend.

f. The firm issues $1 million of long-term debt and uses the proceeds to repay a short-term bank loan.

Solution Preview

a) The money will be locked in inventory creation. So, this would be a use of funds. Inventory will increase on asset side and cash will decrease on asset side.

b) This is a use of cash. The accounts receivables will increase on asset side and cash will ...

Solution Summary

This response discusses the effect of various events on a firm's balance sheet.