At the end of 2007, Wichita purchased equityment totally 500, the seller of the equipment provided 100% debt financing with payments, including inerest , beginning in 2008. How does the equipment purchase impact Wichita’s 2007 cash flow statement? investing activities financing activities a Outflow inflow b inflow outflow c no effect no effect d no effect out flow?
C?
I’m with C
sounds like a.
“beginning in 2008.” No effect on 2007 cashflow.
c, no cash flow.
Purchasing long term assets with borrowed funds is not an exchange of cash, so it would have no effect on the cash flow statements. It would probably be reflected in a supplementary schedule to the cash flow statement, or in the footnotes, if the amount is significant - in which case it would be disclosed as “significant noncash investing and financing activity”. I say C too.
So what would you classify as when you begin to pay back the interest, under US GAAP? Financing or Operating? I orginally thought interests payments or interest received were only to be classified under operatiing outflows/inflows using US GAAP but I took a sample test and a question on there proved me different.
JP_RL_CFA Wrote: ------------------------------------------------------- > So what would you classify as when you begin to > pay back the interest, under US GAAP? Financing > or Operating? > > I orginally thought interests payments or interest > received were only to be classified under > operatiing outflows/inflows using US GAAP but I > took a sample test and a question on there proved > me different. You are looking too hard into this. When does the cash actually move?
JP_RL_CFA Wrote: ------------------------------------------------------- > So what would you classify as when you begin to > pay back the interest, under US GAAP? Financing > or Operating? I guess in 2008, when starting to pay back, interest would be CFO, principal would be CFF?
map1 Wrote: ------------------------------------------------------- > I guess in 2008, when starting to pay back, > interest would be CFO, principal would be CFF? Yep.
map1 Wrote: ------------------------------------------------------- > Purchasing long term assets with borrowed funds is > not an exchange of cash, so it would have no > effect on the cash flow statements. It would > probably be reflected in a supplementary schedule > to the cash flow statement, or in the footnotes, > if the amount is significant - in which case it > would be disclosed as “significant noncash > investing and financing activity”. > > I say C too. While the NET effect of the two transactions is zero, the SCF disaggregates the transaction into its component parts. So, focus on the activites/accounts included in each of the 3 sections of the SCF. Note that the net effect on the cash holdings of the firm is only the LAST item on the statement. CF from operating activites - no effect (Neither NI, Depreciation, interest payments, nor changes in Net Working Capital are involved). CF from investing activities - based on the change in GROSS FIXED ASSETS or LONG-TERM INVESTMENTS. THese increased by $500, so there is an OUTFLOW of cash CF from financing activities - based on all fund to or from outside, long-term claimants (payments of dividends, issues of debt or equity, or repayments of same). The seller lent the firm $500 (I’m assuming it’s long-term), so this represents an INFLOW. If it were short-tem financing (i.e. < 1 year), it might be operating cash flow. Therefore, it’s A.
schjew, whats the correct answer? I thought it is A as well.
Sorry guys, I was a little busy yesterday. The correct answer is C I agree with map1. The key to answer this question is “totally with debt financing”. It means that the seller gives u asset for “free” . Remeber, If no cash exchange on hand, no cashflow. Another case would be, u borrow from others and go outside and buy an asset. Even if the “net effect” is zero,but there is a cash transaction. So, under such condition, U should choose A
yet another reminder of why I’m not an accountant
busprof Wrote: ------------------------------------------------------- > yet another reminder of why I’m not an accountant haha, I hate accountanting too. Just remember, no cash, no record.
busprof Wrote: ------------------------------------------------------- > CF from investing activities - based on the change > in GROSS FIXED ASSETS or LONG-TERM INVESTMENTS. > THese increased by $500, so there is an OUTFLOW of > cash An increase in fixed assets does not mean that there was a cashflow that took place. You guys are really looking to hard into this. >yet another reminder of why I’m not an accountant Unfortunately I am right now… yuk.
So what would be the transactions be, from balance sheet perspective? for purchase, Increase in long term asset and increase in long term debt?