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Question; In the case of a bank overdraft:

  1. GAAP typically includes the amount in cash and cash equivalents.
  2. IFRS typically includes the amount in cash equivalents but not in cash.
  3. GAAP typically treats the overdraft as a liability, and reports the amount in the financing section of the statement of cash flows.
  4. IFRS typically treats the overdraft as a liability, and reports the amount in the investing section of the statement of cash flows.

Short Answer

Expert verified

Answer

Option (c) is the correct option.

Step by step solution

01

Meaning of Bank Overdraft

A credit facility known as an overdraft permit for withdrawing funds from a current or investment funds accounts even when there's no cash within the account or a balance as low as zero. A sort of bank credit restrain extension is the overdraft facility. It is argued that the authorized limit is "overdrawn."

02

Explaining the correct option

Overdrafts from banks are ordinarily respected as financing activities. Be that as it may, bank overdrafts are regarded as a portion of cash and cash reciprocals where demand-repayable bank borrowings constitute a fundamental component of the Companyโ€™s cash administration.The amount of the overdraft is normally reported in the financing section of the statement of cash flows under GAAP, which classifies it as a liability.

03

Explaining the incorrect option

Option (a) To be clear, the "Cash and Cash Equivalents" line item includes currency and investments resembling cash, such as actual cash in bank accounts. Examples of commercial paper, short-term government bonds, and marketable securities are cash and cash equivalents.

Option (b) Cash incorporates deposits made on demand and cash on hand. Cash counterparts are exceedingly liquid, short-term assets that can be effortlessly changed over into known sums of cash and are, as it were, slightly at risk of losing value.

Option (d) In agreement with IFRS Standards, bank overdrafts that are repayable promptly and are pivotal to the organization's cash management diminish the balance of cash and cash equivalents within the statement of cash flow

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Most popular questions from this chapter

Stansfield Corporation had the following activities in 2017.

1. Payment of accounts payable \(770,000.

4. Collection of note receivable \)100,000.

2. Issuance of common stock \(250,000.

5. Issuance of bonds payable \)510,000.

3. Payment of dividends \(350,000.

6. Purchase of treasury stock \)46,000.

Compute the amount Stansfield should report as net cash provided (used) by financing activities in its 2017 statement of cash flows.

Wainwright Corporation had the following activities in 2017:

1. Sale of land \(180,000.

4. Purchase of equipment \)415,000.

2. Purchase of inventory \(845,000.

5. Issuance of common stock \)320,000.

3. Purchase of treasury stock \(72,000.

6. Purchase of available-for-sale debt securities \)59,000.

Compute the amount Wainwright should report as net cash provided (used) by investing activities in its 2017 statement of cash flows.

Of what use is the statement of cash flows?

Differentiate between the direct method and the indirect method by discussing each method

Dingel Corporation has contracted with you to prepare a statement of cash flows. The controller has provided the following information.

December 31

2017

2016

Buildings

\( โ€“0โ€“

\)29,750

Equipment

45,000

20,000

Patents

5,000

6,250

Investments

โ€“0โ€“

3,000

Inventory

12,000

9,000

Accounts receivable

12,250

10,000

Cash

33,500

13,000

\(107,750

\)91,000

Share capitalโ€”ordinary

\( 43,000

\)33,000

Retained earnings

20,750

6,000

Allowance for doubtful accounts

3,000

4,500

Accumulated depreciation on equipment

2,000

4,500

Accumulated depreciation on buildings

โ€“0โ€“

6,000

Accounts payable

5,000

3,000

Dividends payable

โ€“0โ€“

5,000

Long-term notes payable

31,000

25,000

Notes payable, short-term (non-trade)

3,000

4,000

\(107,750

\)91,000

Additional data related to 2017 are as follows.

  1. Equipment that had cost 11,000andwas402,500.
  2. \(10,000 of the long-term notes payable was paid by issuing ordinary shares.
  3. Cash dividends paid were \)5,000.
  4. On January 1, 2017, the building was completely destroyed by a flood. Insurance proceeds on the building were \(32,000.
  5. Equity investments (non-trading) were sold at \)1,700 above their cost.
  6. Cash was paid for the acquisition of equipment.
  7. A long-term note for \(16,000 was issued for the acquisition of equipment.
  8. Interest of \)2,000 and income taxes of $6,500 were paid in cash.

Instructions Prepare a statement of cash flows using the indirect method.

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