Avatar Company uses the indirect method to prepare its statement of cash flows. Please refer to the following information for the year 2014:
$$\begin{array} { l r }
\text { Long-term notes payable, beginning balance } & \$ 90,000 \
\text { Long-term notes payable, ending balance } & 84,000 \
\text { Common stock, beginning balance } & 2,000 \
\text { Common stock, ending balance } & 30,000 \
\text { Retained earnings, beginning balance } & 74,000 \
\text { Retained earnings, ending balance } & 113,000 \
\text { Treasury stock, beginning balance } & 5,000 \
\text { Treasury stock, ending balance } & 8,000
\end{array}$$
• No stock was retired.
• No treasury stock was sold.
• During 2014, the company repaid $40,000 of long-term notes payable.
• During 2014, the company borrowed $34,000 on a new note payable.
• Net income for the year was $49,000.
How much was the net cash flow from financing activities?
A) $59,000 positive cash flow
B) $42,000 positive cash flow
C) $9,000 negative cash flow
D) $9,000 positive cash flow

Question

Avatar Company uses the indirect method to prepare its statement of cash flows. Please refer to the following information for the year 2014:
$$\begin{array} { l r } 
\text { Long-term notes payable, beginning balance } & \$ 90,000 \
\text { Long-term notes payable, ending balance } & 84,000 \
\text { Common stock, beginning balance } & 2,000 \
\text { Common stock, ending balance } & 30,000 \
\text { Retained earnings, beginning balance } & 74,000 \
\text { Retained earnings, ending balance } & 113,000 \
\text { Treasury stock, beginning balance } & 5,000 \
\text { Treasury stock, ending balance } & 8,000
\end{array}$$
• No stock was retired.
• No treasury stock was sold.
• During 2014, the company repaid $40,000 of long-term notes payable.
• During 2014, the company borrowed $34,000 on a new note payable.
• Net income for the year was $49,000.
How much was the net cash flow from financing activities?
A) $59,000 positive cash flow
B) $42,000 positive cash flow
C) $9,000 negative cash flow
D) $9,000 positive cash flow

Quizplus · Accepted Answer

Net cash flow from financing activities is calculated by considering changes in long-term notes payable, common stock, treasury stock, and any dividends paid (which can be inferred from changes in retained earnings). - Long-term notes payable decreased by $6,000 overall ($90,000 - $84,000), but this includes repaying $40,000 and borrowing $34,000, which nets to a $6,000 repayment.- Common stock increased by $28,000 ($30,000 - $2,000).- Treasury stock increased by $3,000 ($8,000 - $5,000), which is a cash outflow since it represents the company buying its own stock.- To find dividends paid, we start with the change in retained earnings ($113,000 - $74,000 = $39,000 increase) and subtract net income ($49,000) to find that dividends paid must have been $10,000 ($49,000 - $39,000).So, the net cash flow from financing activities is the sum of these items: - Repayment of notes payable is a cash outflow: -$6,000- Issuance of common stock is a cash inflow: +$28,000- Purchase of treasury stock is a cash outflow: -$3,000- Dividends paid is not directly a part of financing activities calculation here since we're focusing on long-term liabilities and equity changes.Therefore, the net cash flow from financing activities is $28,000 - $6,000 - $3,000 = $19,000. However, given the options provided and the calculations, it seems there might be a misunderstanding in the breakdown of components or a mistake in the calculation as none of the options match this result. Given the options and re-evaluating the provided information:- The repayment and borrowing of notes payable net to a decrease in cash flow, but since we're given specific transactions (repayment of $40,000 and borrowing of $34,000), we should focus on the net effect of financing activities directly stated or implied:  - Increase in common stock provides cash.  - Increase in treasury stock reduces cash.  - The direct transactions mentioned (repayment of $40,000 and borrowing of $34,000) should be considered in the context of financing activities.Given the discrepancy and focusing on the direct information provided:- Borrowing $34,000 (cash inflow)- Repaying $40,000 (cash outflow)- Issuing common stock $28,000 (cash inflow)- Buying treasury stock $3,000 (cash outflow)The correct calculation based on the direct information provided and typical treatment of these items in financing activities would be:- $34,000 (borrowing) + $28,000 (common stock) - $40,000 (repayment) - $3,000 (treasury stock) = $19,000 net inflow.Given the options and the mistake in the initial explanation, the closest or intended correct answer based on the provided transactions and typical cash flow statement treatment would be D) $9,000 positive cash flow, acknowledging an error in the detailed breakdown versus the options provided. This suggests a need to reevaluate the explanation or the options for accuracy.

Avatar Company Uses the Indirect Method to Prepare Its Statement