Final answer:
Palmer Company should disclose the purchase of equipment with a promissory note in the financing section of their statement of cash flows, but it will not appear as a cash outflow until the payments are made. The transaction is similar to loans between banks and businesses where reserves may increase but do not impact cash flows immediately.
Step-by-step explanation:
The student's question relates to how Palmer Company should report the purchase of equipment with a promissory note in their statement of cash flows. When a company acquires an asset like equipment by signing a promissory note, the transaction is considered a financing activity but does not result in an immediate cash outflow. Therefore, in the statement of cash flows, the purchase of equipment by signing a promissory note should be disclosed in the financing section but not reflected in the cash flows. Instead, the impact on cash flows will be recognized in the future when the actual cash payments are made according to the terms of the note.
For example, if Singleton Bank lends $9 million to Hank’s Auto Supply and Hank deposits the loan, First National’s reserves increase by the loan amount. However, this loan transaction doesn't immediately affect Singleton Bank's cash flows, similar to how the equipment purchase doesn't affect Palmer Company’s current cash flows.
Let’s consider a scenario linked to the subject of interest rates and investments: If a company can capture a 5% return to society while the cost of financial capital is 9%, the firm would invest as if its effective rate of return is 4%. The firm's investment decision, in this case, would reflect the current market conditions and cost of capital as outlined by their understanding of future benefits, similar to the way Palmer Company must consider the cost implications of their equipment purchase and promissory note over time.