Any thoughts on the following question? It seems to go against my logic: For the year ended December 31, 2007, Gremlin Corporation reported the following transactions: 1. Issued 5,000 shares of preferred stock for land with a fair value of $4.8 million. 2. Purchased a patent for $3.3 million cash. 3. Acquired 40% of the common stock of an affiliate for $2.7 million cash which was borrowed from a bank. 4. Exchanged equipment with a book value of $1.7 million for equipment valued at $2.1 million. The exchange was an even trade. 5. Converted bonds payable with a book value of $5 million to 50,000 shares of common stock with a fair value of $6 million. 6. 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) $6.0 million outflow (CFI) $2.7 million inflow (CFF) B) $1.7 million inflow (CFI) $1.3 million outflow (CFF) C) $2.7 million outflow (CFI) $6.0 million inflow (CFF) The answer is A. I understand where that comes from but my question is that - Isn’t transaction #3 an example of a non-cash transaction? In Schweser, it mentions that examples of non-cash transactions that should not be reported on the income statement include - “acquisition of real estate with financing provided by the seller” and “exchange of debt for equity”. In transaction #3, the firm is first taking a loan of $2.7m from a bank and then immediately buying stocks of its affiliate. So when does this cash hit the cashflow statement? Also, isn’t the net cash flow from this transaction zero? Please clarify what non-cash transactions would include!??? Thanks!
Correction: The answer is A. I understand where that comes from but my question is that - Isn’t transaction #3 an example of a non-cash transaction? In Schweser, it mentions that examples of non-cash transactions that should not be reported on the ***cashflow statement*** include - “acquisition of real estate with financing provided by the seller” and “exchange of debt for equity”. In transaction #3, the firm is first taking a loan of $2.7m from a bank and then immediately buying stocks of its affiliate. So when does this cash hit the cashflow statement? Also, isn’t the net cash flow from this transaction zero?
Actually the net cash of these transaction is zero but they are recorded in separated section in the CFS. “acquisition of real estate with financing provided by the seller”, if the bank is the seller of the stock so it is non cash transaction. Since the question does not clearly state otherwise we assume that the bank only provides financing and this should be recorded in the CFF.
Can anyone please mention how the answer is A?
A) CFI = 2.7 + 3.3 = 6 mill CFF = 2.7 (borrowing the funds from the bank)
CFA1 Buster Wrote: ------------------------------------------------------- > Correction: > Isn’t transaction > #3 an example of a non-cash transaction? In > Schweser, it mentions that examples of non-cash > transactions that should not be reported on the > ***cashflow statement*** include - “acquisition of > real estate with financing provided by the seller” In this Schweser example where do you see any actual cash changing hands? > and “exchange of debt for equity”. Same question here >In transaction #3, the firm is first taking a loan of $2.7m from > a bank That sounds like they got cash to me > and then immediately buying stocks of its > affiliate. Looks like they used cash here > So when does this cash hit the cashflow > statement? Also, isn’t the net cash flow from this > transaction zero? Both legs hit the CF statement, one as a source under financing, the other as a use under investing. The net cash flow is zero, but we don’t report net cash. Just as in acase where you borrow dollars to buy inventory, we still look at the gross flows.