The following information should be used according to the provisions of SFAS 95 (Statement of Cash flows) and using the following data.
Net Income $50,000 -
Provision for bad debts $2,000 -
Increase in Inventory $1,000 -
Increase in accounts payable $2,000
Purchase of new equipment $15,000
Sale of equipment for $10,000 gain $20,000
Depreciation expense $5,000 -
Repurchase of common stock $10,000
Payment of dividend $4,000 -
Interest payment $3,000 -
What is net cash flow from financing?
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A. B. C. D.D
($14,000) = ($10,000) for repurchase of stock and ($4,000) for payment of dividend
To calculate the net cash flow from financing activities, we need to identify the cash flows related to financing activities and then determine the net effect of these cash flows.
Financing activities generally include transactions that involve obtaining or repaying funds to finance the company's operations or investments. Examples of financing activities include issuing or repurchasing equity shares, obtaining or repaying loans, and paying dividends.
Let's analyze each item from the given information to determine its classification as a financing activity and its effect on net cash flow:
Net Income: Net income is the profit earned by the company from its operations and is not directly related to financing activities. Therefore, it is not included in the calculation of net cash flow from financing.
Provision for bad debts: The provision for bad debts represents an expense related to the estimated uncollectible accounts receivable. It is an operating activity and not included in the calculation of net cash flow from financing.
Increase in Inventory: An increase in inventory indicates the company has spent cash to acquire additional inventory. It is a cash outflow from operating activities and not included in the calculation of net cash flow from financing.
Increase in accounts payable: An increase in accounts payable represents additional funds obtained by delaying payment to suppliers. It is a source of cash and considered a financing activity. Therefore, it will be included in the calculation of net cash flow from financing as a positive value.
Purchase of new equipment: The purchase of new equipment is a cash outflow used to acquire long-term assets. It is considered a cash flow from investing activities and not included in the calculation of net cash flow from financing.
Sale of equipment for $10,000 gain: The sale of equipment for a gain represents a cash inflow from investing activities. As it is not related to financing, it is not included in the calculation of net cash flow from financing.
Depreciation expense: Depreciation is a non-cash expense and not included in the calculation of net cash flow from financing.
Repurchase of common stock: The repurchase of common stock involves using cash to buy back the company's own shares. It is considered a cash outflow from financing activities and will be included in the calculation of net cash flow from financing as a negative value.
Payment of dividend: The payment of dividends is a cash outflow from financing activities and will be included in the calculation of net cash flow from financing as a negative value.
Interest payment: The interest payment represents cash outflow related to the company's debt obligations. It is a financing activity and will be included in the calculation of net cash flow from financing as a negative value.
Now, let's calculate the net cash flow from financing:
Increase in accounts payable: +$2,000 (positive value as it is a source of cash) Repurchase of common stock: -$10,000 (negative value as it is a cash outflow) Payment of dividend: -$4,000 (negative value as it is a cash outflow) Interest payment: -$3,000 (negative value as it is a cash outflow)
Net cash flow from financing = +$2,000 - $10,000 - $4,000 - $3,000 = -$15,000
Therefore, the net cash flow from financing is -$15,000. The correct answer is (B) ($17,000) since it is the option closest to the calculated value.