Question

Avatar Company uses the indirect method to prepare its statement of cash flows. Please refer to the following portion of the comparative balance sheet:

2014 2013 Increase/decrease
Accounts payable $ 4,000 $ 6,000 $(2,000)
Accrued liabilities 2,000 1,000 1,000
Long-term notes payable 84,000 90,000 (6,000)
Total liabilities $90,000 $97,000 $(7,000)
Additional information provided:
During 2014, the company repaid $40,000 of long-term notes payable.
During 2014, the company borrowed $34,000 on a new note payable.
Based on the above information only, what amount of net cash flow would be shown in the financing section of the statement of cash flows?
A) $6,000 negative
B) $6,000 positive
C) $5,000 positive
D) $7,000 negative

Answer 1

The net cash flow in the financing section of the statement of cash flows for Avatar Company would be a $6,000 negative, as the company paid more toward loans than it borrowed.

Step-by-step explanation:

To determine the net cash flow shown in the financing section of the statement of cash flows using the indirect method, we need to consider the changes in long-term notes payable as well as any new borrowings or repayments that occurred during the year.

Given that the company repaid $40,000 of long-term notes payable and borrowed $34,000 on a new note payable, we can calculate the net cash flow as follows:

• Cash outflow from repayment of notes payable: $(40,000)
• Cash inflow from new borrowings: $34,000

Net cash flow from financing activities is the inflow minus the outflow:

$34,000 (inflow) - $40,000 (outflow) = $(6,000)

Therefore, the net cash flow in the financing section would be a $6,000 negative, which is option (A).

Answer 2

D) $7,000 negative

Step-by-step explanation:

What amount of net cash flow would be shown in the financing section of the statement of cash flows?

Amount of net cash flow to be shown in the financing section of the statement of cash flows = Decrease in Account payable - Increase in accrued liabilities + Borrow of new long term notes payable - Repayment of long term notes payable

= -$2,000 + $1,000 + $34,000 - $40,000

= -$7,000