[huytuan124]

Wiley Question –

---

Flax Company’s working capital at December 31, year 1, was $1,700,000. Data pertaining to year 2 are as follows:

Working capital provided by operations $900,000

Purchases of plant assets for cash 600,000

Short-term borrowings 950,000

Payments on short-term borrowings 500,000

Cash dividends paid on common stock 250,000

Flax’s working capital at December 31, year 2, was

• $1,750,000

• $2,000,000

• $2,200,000

• $2,450,000

---

The answer is $1,750,000 (1,900,000 + 900,000 – 600,000 – 250,000). I understand how the Short-term borrowings and the Payments on short-term borrowings are not included in the calculation because they have no effect on working capital (both current assets and current liabilities will increase or decrease).

I just don’t understand why the cash dividends paid is included. Don’t we Dr Dividend Payable and Cr Cash when we paid dividends, meaning both current asset and current liabilities are affected (decreased) at the same time?

 

 

FAR: 80 02/01/2014
AUD: 53,80 12/09/2014
BEC: TBD
REG: TBD

Yaeger Home Study + Ninja Audio

[M.O.D.]

I would think because it says “cash dividends” they were paid in cash, and deducted from cash, a current asset.

The JE:

Dr: Equity (RE)

Cr. Cash

Here is some more clarification. Even if they go through Div payable they are still not included:

https://www.wallstreetoasis.com/forums/please-help-dividends-and-operating-working-capital

BA Mathematics, UC Berkeley
Certificates in CPA and EA preparation, College of San Mateo
CMA I 420, II 470
FAR 91, AUD Feb 2015 (Gleim self-study)

[M.O.D.]

I would think because it says “cash dividends” they were paid in cash, and deducted from cash, a current asset.

The JE:

Dr: Equity (RE)

Cr. Cash

Here is some more clarification. Even if they go through Div payable they are still not included:

https://www.wallstreetoasis.com/forums/please-help-dividends-and-operating-working-capital

BA Mathematics, UC Berkeley
Certificates in CPA and EA preparation, College of San Mateo
CMA I 420, II 470
FAR 91, AUD Feb 2015 (Gleim self-study)

[huytuan124]

Thanks M.O.D. Sorry but I'm a little bit confused here. Are you saying we shouldn't include the cash dividends in the calculation, as mentioned in the link? BTW, I believe the entry at the payment date is Dr Dividends Payable and Cr Cash.

FAR: 80 02/01/2014
AUD: 53,80 12/09/2014
BEC: TBD
REG: TBD

Yaeger Home Study + Ninja Audio

[huytuan124]

Thanks M.O.D. Sorry but I'm a little bit confused here. Are you saying we shouldn't include the cash dividends in the calculation, as mentioned in the link? BTW, I believe the entry at the payment date is Dr Dividends Payable and Cr Cash.

FAR: 80 02/01/2014
AUD: 53,80 12/09/2014
BEC: TBD
REG: TBD

Yaeger Home Study + Ninja Audio

[M.O.D.]

Your assumption that there is a balance in Div Pay assumes the company followed a formal declaration beforehand:

Dr RE

Cr Div Pay

But it is possible that the owner wrote himself a check for $250,000 because there was a one-day sale on yacht. What is the JE then?

BA Mathematics, UC Berkeley
Certificates in CPA and EA preparation, College of San Mateo
CMA I 420, II 470
FAR 91, AUD Feb 2015 (Gleim self-study)

[M.O.D.]

Your assumption that there is a balance in Div Pay assumes the company followed a formal declaration beforehand:

Dr RE

Cr Div Pay

But it is possible that the owner wrote himself a check for $250,000 because there was a one-day sale on yacht. What is the JE then?

BA Mathematics, UC Berkeley
Certificates in CPA and EA preparation, College of San Mateo
CMA I 420, II 470
FAR 91, AUD Feb 2015 (Gleim self-study)

[mla1169]

You're assuming that the dividends paid were accrued in year 1. The problem doesn't state that, and treats the answer as if the dividends were declared and paid in year 2. It wouldn't be necessary to accrue dividends payable if they were paid in the same year they were declared but even If you did the net effect on current liabilities in year 2 would be zero.

FAR- 77
AUD -49, 71, 84
REG -56,75!
BEC -75

Massachusetts CPA (non reporting) since 3/12.

[mla1169]

You're assuming that the dividends paid were accrued in year 1. The problem doesn't state that, and treats the answer as if the dividends were declared and paid in year 2. It wouldn't be necessary to accrue dividends payable if they were paid in the same year they were declared but even If you did the net effect on current liabilities in year 2 would be zero.

FAR- 77
AUD -49, 71, 84
REG -56,75!
BEC -75

Massachusetts CPA (non reporting) since 3/12.

[huytuan124]

Thanks guys. It makes sense now.

FAR: 80 02/01/2014
AUD: 53,80 12/09/2014
BEC: TBD
REG: TBD

Yaeger Home Study + Ninja Audio

[huytuan124]

Thanks guys. It makes sense now.

FAR: 80 02/01/2014
AUD: 53,80 12/09/2014
BEC: TBD
REG: TBD

Yaeger Home Study + Ninja Audio

[mla1169]

If the problem said that year 1 dividends were paid in year 2, you would be correct, it is only the timing that makes a difference,

FAR- 77
AUD -49, 71, 84
REG -56,75!
BEC -75

Massachusetts CPA (non reporting) since 3/12.

[mla1169]

If the problem said that year 1 dividends were paid in year 2, you would be correct, it is only the timing that makes a difference,

FAR- 77
AUD -49, 71, 84
REG -56,75!
BEC -75

Massachusetts CPA (non reporting) since 3/12.

[Author]

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