A gain is recognized when a firm pays less than book

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A gain is recognized when a firm pays less than book value to pay off a liability. A loss is recognized when a firm pays more than book value to pay off a liability. Book Value of Liability - Cash Paid for Liability (Cash Outflow) = Gain (Loss) on Payment of Liability The gain is subtracted from net income and the loss is added back to net income to neutralize its impact on cash flow from operations. Example: Bonds payable of $100 were retired (paid off) for $105. Book Value of Liability 100 - Cash Paid for Liability 105 (shown as cash outflow in financing section) = Loss on Liability 5 The loss decreased net income. Income before loss 100 - Loss from Pmt Debt 5 Net Income 95 Losses are added to net income in cash flow from operations because the payment of debt at a loss does not decrease or increase operating cash flows. Net Income (includes loss) 95 + Loss on retirement 5 +/- Other Adjustments XX = Cash Flow from Operations XX The following equations explain the change in equity accounts ∆ Common Stock + Add’l Paid in Capital = Issuance of Stock (Cash inflow) (Common Stock contains the par value of stock issued and Additional Paid in Capital contains the amount received above par). 3
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Riffe - ACCT 6201 – Session 10 – Fall 2018 ∆ - Treasury Stock (negative because contra equity) = - Buy Treasury Stock (Cash outflow that makes it more negative) + Book value of Treasury Stock Reissued ∆ Retained Earnings = Net Income – Dividends (Cash outflow) Format of Complete Statements The section order must be operating, investing, and financing. In the operating section, the order is always (1) net income, (2) depreciation, other noncash expenses, and gains and losses, and (3) accrual adjustments. The order does not matter within items (2) and (3). Purchase of PPE (aka capital expenditures) is usually the first item listed in the investing section. However, the order within the investing and financing sections does not matter. Extra disclosures are required at the end when the indirect method is used for the cash paid for interest and cash paid for taxes. Noncash transactions are to be listed at the end of the cash flow statement. Steps to Completion (1) List all information in income statement. (2) Take care of all transactions where you are given extra information . (3) Go through each account and make sure you have explained the change in the non-cash balance sheet accounts, so you can explain the change in cash.
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