Question

The following data are available for Orange Peels Corporation. $\begin{array}{lr}\text{ Sale of land }& \mathrm{\$}100,000\\ \text{ Sale ofequipment }& 50,000\\ \text{ Issuance of common stock }& 70,000\\ \text{ Purchase of equipment }& 30,000\\ \text{ Payment of cash dividends }& 60,000\end{array}$ Net cash provided by investing activities is: a. $\mathrm{\$}120,000$. c. $\mathrm{\$}150,000$. b. $\mathrm{\$}130,000$. d. $\mathrm{\$}190,000$.

Short answer

The net cash provided by investing activities is $120,000.

Step-by-step solution

Identify Investing Activities

Investing activities typically include transactions that pertain to the acquisition and disposal of long-term assets and investments not included in cash equivalents. From the given data, 'Sale of land', 'Sale of equipment', and 'Purchase of equipment' are considered investing activities.

Calculate Cash Inflows from Investing Activities

Cash inflows from investing activities include the amounts received from selling long-term assets. The sale of land amounts to $100,000andthesaleofequipmentamountsto$50,000. Add these amounts to find total cash inflows from investing activities: $$\text{Total Cash Inflows}=100,000+50,000=150,000$$

Calculate Cash Outflows from Investing Activities

Cash outflows include amounts paid for purchasing long-term assets. The purchase of equipment amounts to $30,000. This is the only cash outflow related to investing activities.

Determine Net Cash Provided by Investing Activities

Net cash provided by investing activities is the difference between total cash inflows and total cash outflows. Subtract the cash outflow from the inflow calculated in the previous steps: $$\text{Net Cash Provided by Investing Activities}=150,000-30,000=120,000$$

Select the Correct Answer

Based on the calculation, the net cash provided by investing activities is $(120,000$. Thus, the correct choice is: a. $)120,000$.

Key concepts

Cash Inflows

Cash inflows represent the money that a company receives from various activities, and in investing activities, they are particularly related to acquiring or selling long-term assets. Long-term assets can include physical items like land and equipment or financial investments. At Orange Peels Corporation, cash inflows are clear from the sale of land and equipment.

These transactions are considered inflows because they bring cash into the business, providing resources for other purposes, like funding new investments or paying down liabilities. Calculating cash inflows is a straightforward process. You simply add the amounts received from selling long-term assets.

• Sale of land: \(100,000
• Sale of equipment: \)50,000

The total cash inflow from these two transactions is:

• Total Cash Inflows: $$100,000+50,000=150,000$$

In any investing activities analysis, identifying and calculating cash inflows is a crucial step. It highlights the value that can be generated from a company's long-term investments.

Cash Outflows

Cash outflows are the opposite of inflows. They occur when a company spends money, in investing activities specifically, this usually happens when purchasing long-term assets. Investing in new equipment, land, or technology means cash is leaving the business.

For Orange Peels Corporation, the purchase of equipment results in a cash outflow of \(30,000.

This event reflects an expenditure aimed at acquiring physical assets that will possibly provide future economic benefits. It is essential for businesses to keep track of such outflows, as they help in assessing the company’s financial health and planning for future investments.

• Purchase of equipment: \)30,000

The correct approach to determine total cash outflows from investing activities is simple. You need to sum up all the expenses related to the acquisition of assets in a given period. In our illustration, Orange Peels Corporation had only one such transaction, making the calculation straightforward. Monitoring cash outflows can greatly help managers and investors understand how effectively a company allocates its resources.

Net Cash Flow

The net cash flow from investing activities is an important financial metric that shows how much cash a company generates or spends through its investing activities during a specific time period. To calculate this, you subtract the total cash outflows from the total cash inflows.

In the context of Orange Peels Corporation, we have the following calculations:

• Total Cash Inflows: \(150,000
• Total Cash Outflows: \)30,000

This results in a net cash flow of:

• Net Cash Flow: $$150,000-30,000=120,000$$

Understanding net cash flow is incredibly important. It helps provide a clearer picture of whether a company is earning more from its investments than it is spending. A positive net cash flow suggests that more cash is being generated from selling assets than is required to buy new ones. This can indicate effective investment strategies. Conversely, a negative net cash flow may suggest that a company is investing heavily for future growth.