This is the full explanation of the Cash Flows From Financing Activities section of the statement of cash flows for Lucky 7, Inc., which was presented earlier in the lesson.
You will need the following data from the company's financial statements to complete the Cash Flows From Financing Activities section of the statement of cash flows:
From the balance sheet, you need information on long-term liabilities and stockholders’ equity:
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| 2016 | 2015 | Increase/decrease |
|---|---|---|---|
| Notes payable | $250,000 | $150,000 | $100,000 |
| Common stock, $5 par value | $150,000 | $100,000 | $50,000 |
| Additional paid-in capital | $116,000 | $66,300 | $49,700 |
| Retained earnings | $111,000 | $66,000 | $45,000 |
| Treasury stock | ($12,500) | $0 | ($12,500) |
Below, each transaction will be analyzed and shown as it would appear on the statement of cash flows.
The company purchased $50,000 of plant assets in exchange for notes payable. You would record this transaction in the general journal as follows:
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| Debit | Credit |
|---|---|---|
| Plant assets | $50,000 |
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|
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Notes payable
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| $50,000 |
You are preparing the statement of cash flows; therefore, you are interested in the amount of cash disbursed or received. In this case, no cash was disbursed or received. This transaction will appear in the Non-cash Investing and Financing section of the statement of cash flows.
The company repaid $75,000 of notes payable. You would record this transaction in the general journal as follows:
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| Debit | Credit |
|---|---|---|
| Notes payable | $75,000 |
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|
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Cash
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| $75,000 |
In this case, $75,000 was disbursed to repay notes payable.
The company borrowed $125,000 cash, signing a long-term note payable. You would record this transaction in the general journal as follows:
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| Debit | Credit |
|---|---|---|
| Cash | $125,000 |
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|
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Notes payable
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| $125,000 |
In this case, $125,000 was received due to the issuance of notes payable.
Transactions 5, 6, and 7 explain the $100,000 increase in notes payable as shown below:
| Notes payable (January 1, 2016) | $150,000 |
| Add: purchase of plant assets in exchange for notes payable | $50,000 |
| Deduct: repayment of notes | ($75,000) |
| Add: borrowed cash, signed note payable | $125,000 |
| Notes payable (December 31, 2016) | $250,000 |
These transactions will appear in the Cash Flows From Financing Activities section of the statement of cash flows as follows:
| Cash payment of notes payable | ($75,000) |
| Cash receipt from issuance of notes payable | $125,000 |
Note that a positive number represents a cash inflow, and a negative number represents a cash outflow.
The company issued 10,000 shares of $5.00 par value common stock for $9.97. You would record this transaction in the general journal as follows:
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| Debit | Credit |
|---|---|---|
| Cash | $99,700 |
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|
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Common stock
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| $50,000 |
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Paid-in capital in excess of par
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| $49,700 |
In this case, $99,700 was received due to the issuance of common stock.
Transaction 8 explains the $50,000 increase in the common stock account and the $49,700 increase in the account for paid-in capital in excess of par value. This transaction will appear in the Cash Flows From Financing Activities section of the statement of cash flows as follows:
| Cash receipt from the issuance of common stock | $99,700 |
Recall that a positive number represents a cash inflow, and a negative number represents a cash outflow.
The company paid a $4,000 dividend. You would record this transaction in the general journal as follows:
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| Debit | Credit |
|---|---|---|
| Dividends | $4,000 |
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|
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Cash
|
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| $4,000 |
In this case, $4,000 was due to the dividend.
Transaction 9 and the net income from the balance sheet explain the $45,000 increase in the retained earnings account (the statement of retained earnings):
| Retained earnings (January 1, 2016) | $66,000 |
| Add: net income | $49,000 |
| Deduct: dividends | ($4,000) |
| Retained earnings (December 31, 2016) | 111,000 |
This transaction will appear in the Cash Flows From Financing Activities section of the statement of cash flows as follows:
| Cash payment of dividends | ($4,000) |
Recall that a positive number represents a cash inflow, and a negative number represents a cash outflow.
The company purchased 10,000 shares of treasury stock for $12,500. You would record this transaction in the general journal as follows:
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| Debit | Credit |
|---|---|---|
| Treasury stock | $12,500 |
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|
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Cash
|
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| $12,500 |
In this case, $12,500 was disbursed. This transaction explains the increase in the balance of treasury stock and will appear in the Cash Flows From Financing Activities section of the statement of cash flows as follows:
| Cash payment for purchase of treasury stock | ($12,500) |
Recall that a positive number represents a cash inflow, and a negative number represents a cash outflow.
| Cash payment of notes payable | ($75,000) |
| Cash receipt from issuance of notes payable | $125,000 |
| Cash receipt from issuance of common stock | $99,700 |
| Cash payment of dividends | ($4,000) |
| Cash payment for purchase of treasury stock | ($12,500) |
| Net cash flows from financing activities | $133,200 |