Q31. Capital Corp.’s activities in the year 2005 included the following:

• At the beginning of the year, Capital purchased a cargo plane from Aviation Partners for $10 million in a transaction consisting of $2 million cash, $3 million in Capital Corp. bonds and $5 million in Capital Corp. preferred stock.

• Interest of $150,000 was paid on the bonds, and dividends of $250,000 were paid on the preferred stock.

• At the end of the year, the cargo plane was sold for $12,000,000 cash to Standard Company. Proceeds from the sale were used to pay off the $3 million in bonds held by Aviation Partners.

On Capital Corp.’s Statement of Cash Flow for the year ended December 31, 2005, cash flow from investments (CFI) related to the above activities is:

A)   $10,000,000.

B)   $6,750,000.

C)   $9,750,000.

Q32. Favor, Inc.’s capital and related transactions during 2005 were as follows:

• On January 1, $1,000,000 of 5-year 10% annual interest bonds were issued to Cover Industries in exchange for old equipment owned by Cover.

• On June 30, $50,000 of interest was paid to Cover

• On July 1, the bonds were returned to Favor in exchange for $1,500,000 par value 6% preferred stock.

• On December 31, preferred stock dividends of $45,000 were paid to Cover.

Favor, Inc.’s cash flow from financing (CFF) for 2005 (assume U.S. GAAP) is:

A)   -$95,000.

B)   -$45,000.

C)   -$1,045,000.

答案和详解如下：

Q31. Capital Corp.’s activities in the year 2005 included the following:

• At the beginning of the year, Capital purchased a cargo plane from Aviation Partners for $10 million in a transaction consisting of $2 million cash, $3 million in Capital Corp. bonds and $5 million in Capital Corp. preferred stock.

• Interest of $150,000 was paid on the bonds, and dividends of $250,000 were paid on the preferred stock.

• At the end of the year, the cargo plane was sold for $12,000,000 cash to Standard Company. Proceeds from the sale were used to pay off the $3 million in bonds held by Aviation Partners.

On Capital Corp.’s Statement of Cash Flow for the year ended December 31, 2005, cash flow from investments (CFI) related to the above activities is:

A)   $10,000,000.

B)   $6,750,000.

C)   $9,750,000.

Correct answer is A)

Investing cash of $2 million was used to purchase the cargo plane. Proceeds from the sale of the plane were a source of $12 million of investing cash. Net CFI is $12 million − $2 million = $10 million. The interest payment is included in cash from operations (CFO) and the dividend payment in cash from financing (CFF). Redemption of the bonds is a use of cash from financing (CFF).

Q32. Favor, Inc.’s capital and related transactions during 2005 were as follows:

• On January 1, $1,000,000 of 5-year 10% annual interest bonds were issued to Cover Industries in exchange for old equipment owned by Cover.

• On June 30, $50,000 of interest was paid to Cover

• On July 1, the bonds were returned to Favor in exchange for $1,500,000 par value 6% preferred stock.

• On December 31, preferred stock dividends of $45,000 were paid to Cover.

Favor, Inc.’s cash flow from financing (CFF) for 2005 (assume U.S. GAAP) is:

A)   -$95,000.

B)   -$45,000.

C)   -$1,045,000.

Correct answer is B)         

Issuing bonds in exchange for equipment does not affect cash flow. Interest paid is an operating cash flow. Exchanging bonds for stock does not affect cash, but should still be disclosed in a footnote to the Statement of Cash Flows. Dividends paid are considered financing activities. In this case, only the preferred stock dividends paid would be considered CFF.

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