Cash Flow Statement – Investing Section Question

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  • #195896
    JohnWayneIsGod
    Participant

    I have run into some confusion with a question. The correct answer from Wiley is ‘C’ and includes the subtraction of the $550,000 note/real-estate purchase to find the net cash used for investing activities. However, the question appears to show the $550,000 as investing and financing transactions that do not have a cash affect and should instead get a supplemental disclosure per ASC 230.

    Is anyone able to provide any guidance about why the $550k was included in arriving at the answer of ‘C’?

    ****

    Kollar Corp.’s transactions for the year ended December 31, year 2, included the following:

    * Purchased real estate for $550,000 cash which was borrowed from a bank.

    * Sold available-for-sale investment securities for $500,000.

    * Paid dividends of $600,000.

    * Issued 500 shares of common stock for $250,000.

    * Purchased machinery and equipment for $125,000 cash.

    * Paid $450,000 toward a bank loan.

    * Reduced accounts receivable by $100,000.

    * Increased accounts payable by $200,000.

    Kollar’s net cash used in investing activities for year 2 was

    $675,000

    $375,000

    $175,000

    $ 50,000

    FAR - 80

    Courage is being scared to death, but saddling up anyway.

    -John Wayne

Viewing 4 replies - 1 through 4 (of 4 total)
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  • #685962
    Jim Deal
    Member

    The way I read it (someone correct me if I'm wrong):

    The $550,000 real estate investment was purchased in cash. Only three of the transactions classify as investing and you just net the difference between cash in and cash out to arrive at net cash used for investing activities.

    ****** Purchased real estate for $550,000 cash which was…(purchase/sale of asset)…….INVESTING***** (OUT)

    ****** Sold available-for-sale investment securit… $500,000…(purchase/sale of asset)…..INVESTING***** (IN)

    * Paid dividends of $600,000. …………………………………………………………………………………FINANCING-N/A

    * Issued 500 shares of common stock for $250,000……………………………………………………FINANCING-N/A

    ****** Purchased machinery and equi……… for $125,000 cash..(purchase/sale of asset)..INVESTING***** (OUT)

    * Paid $450,000 toward a bank loan. ………….PRINCIPAL=FINANCING, INTEREST=OPERATING-N/A

    * Reduced accounts receivable by $100,000. ……………………………………………………..OPERATING-N/A

    * Increased accounts payable by $200,000. ……………………………………………………….OPERATING-N/A

    IN TOTAL=$500,000; OUT TOTAL=$675,000; NET=$175,000 (OUT)

    I think you're thrown off by the “borrowed from a bank”? I'm not sure that I understand where you are confused exactly. They purchased the real estate investment with cash (the cash was borrowed, not necessarily for real estate).

    #685963
    JohnWayneIsGod
    Participant

    Thanks, Neurons. What you said must be it. Borrowed cash from bank and later used the cash to purchase the real-estate. IMO: This still would not result in a cash effect, and so should only get listed in a supplementary schedule, but I guess this question is what it is.

    FAR - 80

    Courage is being scared to death, but saddling up anyway.

    -John Wayne

    #685964
    greg2015
    Member

    If the question had read that company purchased the real estate by issuing a note to the seller for $550,000, then those activities would be considered non-cash investing and financing and disclosed separately, but not part of the cash flow statement. Whenever a bank loan is involved, generally assume that the activity is cash rather than non-cash.

    AUD: 99
    FAR: 95
    BEC: 89
    REG: 87

    AICPA Ethics: 91

    Licensed Illinois CPA

    #685965
    JohnWayneIsGod
    Participant

    Thanks, Greg. That makes some sense. I'll need to make note of that. The uncertainty around this type of question had me worried that I might second guess myself on exam day.

    FAR - 80

    Courage is being scared to death, but saddling up anyway.

    -John Wayne

Viewing 4 replies - 1 through 4 (of 4 total)
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