# Q of recognition of CFI and CFF

For the year ended December 31, 2007, Gremlin Corporation reported the following transactions: „X Issued 5,000 shares of preferred stock for land with a fair value of \$4.8 million. „X Purchased a patent for \$3.3 million cash. „X Acquired 40 percent of the common stock of an affiliate for \$2.7 million cash which was borrowed from a bank. „X Exchanged equipment with a book value of \$1.7 million for equipment valued at \$2.1 million. The exchange was an even trade. „X 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) \$2.7 million outflow /// \$6.0 million inflow B) \$1.7 million inflow /// \$1.3 million outflow C) \$6.0 million outflow /// \$2.7 million inflow D) \$1.3 million outflow /// \$1.7 million inflow The correct answer from Qbank : C) \$6.0 million outflow \$2.7 million inflow „X Issued 5,000 shares of preferred stock for land with a fair value of \$4.8 million. „X Purchased a patent for \$3.3 million cash. „X Acquired 40 percent of the common stock of an affiliate for \$2.7 million cash which was borrowed from a bank. 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. All of the other transactions are non-cash transactions and are disclosed in the notes to or in a supplementarty schedule to the cash flow statement. I think CFI=-4.8-2.7-3.3=-10.8 CFF=4.8+2.7=7.5 how do you think?

Non-cash transactions are not incorporated in the cash flow statement, but if significant are disclosed in a separate note or a supplementary schedule to the statement of cash flow (see top of page 254 in volume 3 of the CFAi textbook).

map1 Wrote: ------------------------------------------------------- > Non-cash transactions are not incorporated in the > cash flow statement, but if significant are > disclosed in a separate note or a supplementary > schedule to the statement of cash flow (see top of > page 254 in volume 3 of the CFAi textbook). ------------------------------------------------------------- Map, for the “5,000 shares of preferred stock for land with a fair value of \$4.8 million”, why it is a noncash transaction? I think investor pay money to company first, i.e. company has inflow 4.8M, then pay out for the land, i.e. outflow 4.8M. the words in P254 of V3 of CFAi book doesn’t prove this point. BTW, company repurchased own stock, which will be treasury stock. it is also treated as investment. could you pls explain this point?

This would be a non cash transaction because they exchanged 5000 shares for land, the question says nothing about cash changing hands. Financing activities include obtaining or repaying capital (buying back stock that would become treasury stock) - this is a cash outflow, exactly the oposite of issuing stock (which would be a financing cash inflow (page 252 of volume 3, just above the example 1).

annexguy Wrote: ------------------------------------------------------- > Map, > for the “5,000 shares of preferred stock for land > with a fair value of \$4.8 million”, why it is a > noncash transaction? Two points. 1) answer what the question asks, not what you think it should be asking. Its says “issued… for land”. It doesn’t say “issued… and used the proceeds to purchase land”. 2) cash is cash is cash is cash. If it doesn’t explicitly say that cash exchanged hands, it is a non-cash transaction.

map1 Wrote: ------------------------------------------------------- > This would be a non cash transaction because they > exchanged 5000 shares for land, the question says > nothing about cash changing hands. > > Financing activities include obtaining or repaying > capital (buying back stock that would become > treasury stock) - this is a cash outflow, exactly > the oposite of issuing stock (which would be a > financing cash inflow (page 252 of volume 3, just > above the example 1). --------------------------------------------------------------- Yes, repurchase stock (\$2.7M)is a cash outflow financing activities.meanwhile, borrowing cash \$2.7M from bank is cash in flow financing activities .so CFF=-2.7+2.7=0 the land purchase is not involve cash, so CFI=-3.3

Well, you are confusing the investment in the equity of affiliates with comany’s own equity. Investing activities include property, plant, equipment, intangible assets, other long-term assets, and both long and short term investments in the equity and debt issued by other companies. In this case, the company has \$2.7mil as inflow from the bank, but these money are used to buy the equity of other company - an investing outflow. Add the outflow for the purchase of the patent, and you get \$2.7 mil as financing cash inflow, and \$6mil as investing cash outflow.

one question I had – the 3.3 million relates to purchase of a Patent. Is Patent considered an Investment so this outflow becomes a CFI? CP

map/SuperI, I got it now. the "common stock of an affiliate for \$2.7 million cash " is an sister or son company’s stock, not its own stock. so it’s an investment, not financing . CFF=2.7 CFI=-2.7-3.3 I still hardly accept the 4.8M stock issue is not invovled cash. Have you heard this happen in real world?

CPK, yes, a patent is an intangible longterm asset (patents, copyrights, trademarks - identifiable physical intangible assets, and goodwill - unidentifiable tangible).

annexguy Wrote: ------------------------------------------------------- > I still hardly accept the 4.8M stock issue is not > invovled cash. Have you heard this happen in real > world? Variations happen all the time. Companies are regularly purchased in all stock transactions. Joint ventures can be created where a company contributes assets in exchange for stock (I think this is somewhat common in the oild and gas industry where one company has the assets and the other has the technical skills, etc.). .

tks