Drexon Corp., which follows U.S. GAAP, uses the direct method to report its cash

Question

Drexon Corp., which follows U.S. GAAP, uses the direct method to report its cash flows. The CFO is assessing the impact on cash flows of 4 events during the fiscal year. Specify which category each event falls under (under the direct method) and note whether it increases cash, decreases cash, or has no impact on cash. Please explain.

1. Accounts payable decreases from $400,000 to $385,000.

2. An interest payment of $85,000 is made on a new debt issuance.

3. Capital expenditures of $35,000 are made for equipment used in day to day operations.

4. Dividends of $6,500 are received from a stock classified as available for sale.

Explanation / Answer

1. Accounts payable decreases from $400,000 to $385,000.

It is an operating activity.When accounts payable are paid off ,it will result in decreasing cash.

Cash flow will fall by $15,000.

Cash flow from perating activities.

Hence,it will have a negative impact on cash flow.

2. An interest payment of $85,000 is made on a new debt issuance.

It will decrease the cash flow as it is component of cash flow from financing activities.

Cash flow will fall by 85,000.

Cash flow from financing activities.

3. Capital expenditures of $35,000 are made for equipment used in day to day operations.

Purchase of equipment will decrease cash flow as this is an investment activity.This is not the operational activity of business to purchase and sell equipments.

Cash flow will fall by 35,000.

Cash flow from investing activities.

4. Dividends of $6,500 are received from a stock classified as available for sale.

Stock classified as available for sale is an investment and dividend will be cash flow from investment activities.

Cash flow will rise by 6,500.

Cash flow from investment activities.

Net impact on cash flow =-15,000-85,000-35,000+6,500=-1,28,500

Related Questions

Navigate

• Browse (All)
• Browse D
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.