Is it possible to have a single event used in calculating multiple parts of the cash flow statement (CFO, CFI)? Today I came across a schweser question asking for CFI and CFF given two events. When I saw the answer, it had used one of the events for both CFI and CFF. I get that IFRS and GAAP can handle certain accounts differently, but in calculating CFI I was under the impression a single event had to be classified under only one section. Anyone have more insight into this and possibly examples? Thanks!
Can you be more specific?
For example, if you have an amortizing bond, then the single event of making a payment is part CFO (interest) and part CFF (principle) uncer US GAAP. This may not be the situation you describe.
An example I can think of is if you have a gain/loss on the sale/disposale of PPE (sale < residual value) you will see an impact to CFO and also CFI. I realize this isn’t helpful for CFI/CFF but maybe it will trigger a thought
For the year ended December 31, 2007, Gremlin Corporation reported the following transactions:
- Issued 5,000 shares of preferred stock for land with a fair value of $4.8 million.
- Purchased a patent for $3.3 million cash.
- Acquired 40% of the common stock of an affiliate for $2.7 million cash which was borrowed from a bank.
- Exchanged equipment with a book value of $1.7 million for equipment valued at $2.1 million. The exchange was an even trade.
- Converted bonds payable with a book value of $5 million to 50,000 shares of common stock with a fair value of $6 million.
Calculate Gremlin’s cash flow from investing activities and cash flow from financing activities for the year ended December 31, 2007.
Cash flow from investing activities Cash flow from financing activities
A) $1.7 million inflow $1.3 million outflow B) $6.0 million outflow $2.7 million inflow C) $2.7 million outflow $6.0 million inflow View Answer and Explanation
Only the acquisition of common stock of the affiliate for $2.7 million and the purchase of the patent for $3.3 million are included in cash flow from investing activities. Since the acquisition of the stock purchase was financed with a bank loan, $2.7 million will be reported as a financing inflow. Both remaining transactions are non-cash transactions and are disclosed in the notes to or in a supplementarty schedule to the cash flow statement.
This is the question. When I first did it, I assumed the $2.7 million was only an investing activity. I didn’t think it could be classified as both. Is that just a wrong assumption on my part? How is it classified as both?
It didn’t post right. The answer is B.
Two separate transactions:
- Borrow $2.7 million: financing inflow.
- Buy $2.7 million of stock: investing outflow.
Your net (total) cash flow for this is zero, so you have to have an inflow and an outflow.