Use the following information to prepare a statement of cash flows for Stable Equipment Company for the year ended December 31, 2019. Use the indirect method for the operating activities section of the statement. Net income for the year 2019 was $5,000. Accounts receivable decreased $2,000, inventories increased $4,000, accounts payable decreased $7,000, and current maturity of long-term debt increased by $5,000. Depreciation expense included in net income was $8,000. During the year, a piece of land held for future expansion was sold for its book value of $8,000 and a new service truck was purchased for $14,000. The company borrowed $18,000 on a two-year note from the bank. Dividends of $6,000 were paid in cash. Preferred stock was issued to retire $7,000 of long-term notes payable. The beginning cash balance was $22,000 Required:
a. Prepare the Statement of Cash Flows for Stable Equipment Company for the year ended December 31, 2019. Use the indirect method for the operating activities section of the statement. You need to separately classify cash flows from operations, financing and investments.
b. Explain the reason why depreciation is needed to adjust to reconcile net income to cash flow from operations.
c. Explain the reason why you need to adjust gains/losses on disposition of Equipment for the reconciliation between net income and cash flows from operations.