Financial_StatementsMC_solutions - Financial Statements 1....

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Financial Statements 1. Investing activities include the lending of money; the collection of those loans; and the acquisition, sale or other disposal of (1) loans and other securities that are not cash equivalents and that have not been acquired specially for resale and (2) property, plant, equipment, and other productive assets. Thus, the portion of the purchase price paid in cash to acquire a building (a productive asset) should be classified as cash flow form an investing activity. To provide the necessary information about all investing and financial activities, those not involving cash receipts or cash payments during the accounting period should be reported in a separate schedule and not in the statement of cash flows. The issuance of a mortgage as part of the acquisition price of a building does not involve cash. It is therefore classified as a noncash financing activity and is included in a separate schedule. 2. SFAS 95 states, “Financial statements shall not report an amount of cash flow per share.” Reporting per-share amounts might improperly imply that cash flow is an alternative to net income as a performance measure. 3. For an investment in a limited business activity not conducted in a separate business entity (such as an investment in real state and a related mortgage), SOP 82-1 requires that the assets and liabilities not be presented as a net amount. Instead, they should be presented as separate assets at their estimated current values and separate liabilities at their estimated current amounts. This presentation is particularly important if a large option of the liabilities may be satisfied with funds from sources unrelated to the investments. Thus, the land should be reported at its $150,000 fair value and the mortgage principal at $60,000 (the amount at which debt could currently be discharged). 4. Payment of dividends is a financing activity. All other transactions listed are cash flows from operating activities. Accordingly, the net cash flow provided by operations is $260,000 ($870,000 + $10,000 - $510,000 - $110,000). 5. The increase in accounts receivable indicates that cash-basis pretax income is $10,000 lower than accrual-basis pretax income. Revenues from the increase in receivables are reported as earned in an earlier period (Year 2) than the future related cash inflows. The decrease in accounts payable indicates that cash-basis pretax income is $6,000 lower than accrual-basis pretax income. The cash outflows related to the increase in payables
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occurred in Year 2, but the related expense was accrued in Year 1. Hence, cash pretax
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This note was uploaded on 12/09/2009 for the course FAR 5745 taught by Professor Philoreily during the Spring '09 term at Nova Southeastern University.

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Financial_StatementsMC_solutions - Financial Statements 1....

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