Question

The following data are available for Something Strange! \(\begin{array}{lr}\text { Increase in accounts payable } & \$ 40,000 \\ \text { Increase in bonds payable } & 100,000 \\ \text { Sale of investment } & 50,000 \\ \text { Issuance of common stock } & 60,000 \\ \text { Payment of cash dividends } & 30,000\end{array}\) Net cash provided by financing activities is: a. \(\$ 90,000\). c. \(\$ 160,000\). b. \(\$ 130,000\). d. \(\$ 170,000\).

Short answer

Net cash provided by financing activities is $130,000 (option b).

Step-by-step solution

Identify Financing Activities

Financing activities include transactions related to long-term liabilities and equity. In this case, these activities are: Increase in bonds payable, Issuance of common stock, and Payment of cash dividends.

Calculate Positive Cash Flows

From the identified financing activities, calculate the positive cash inflows:- Increase in bonds payable: +\(100,000\)- Issuance of common stock: +\(60,000\)

Calculate Negative Cash Flows

Identify the cash outflow from financing activities:- Payment of cash dividends: -\(30,000\)

Determine Net Cash Provided by Financing Activities

Combine the positive and negative cash flows from financing activities:\(100,000 + 60,000 - 30,000 = 130,000\)

Select the Correct Answer

The net cash provided by financing activities is \(\$ 130,000\), which matches option b.

Key concepts

Financing Activities

Financing activities are essential parts of a company's cash flow statement. They involve transactions that affect a company's capital structure. Think of financing activities as the ways a business finds resources to fund its operations and investments.
These activities include but are not limited to the issuance of debt or equity. Activities such as increasing bonds payable reflect a company taking on more debt, which is a way to finance operations or expand the business. On the other hand, issuance of common stock is a way to bring in new investors, providing more cash into the business.
Both of these activities result in positive cash flow, meaning that they add to the cash a company has to work with. However, financing activities also include outflows like payment of dividends, which reduce cash on hand. Payments made to shareholders as dividends are subtracted because they represent cash leaving the business. Understanding how these things affect cash flow is crucial to getting a full financial picture of a business.

Cash Flow Statement

The cash flow statement is a financial report that shows how cash is generated and used during a specific period. It is one of the three primary financial statements, alongside the balance sheet and income statement. Understanding a cash flow statement can reveal insights into a company’s liquidity and overall financial health. It divides cash flows into three categories: operating, investing, and financing activities. Each section describes different sources and uses of cash. A positive cash flow from any section indicates that a company is generating more cash than it is spending, which is generally a good sign. On the other hand, a negative cash flow may indicate potential cash flow problems but could also suggest planned investments or growth initiatives. By analyzing all sections together, stakeholders can gauge a company’s ability to maintain operations, service debt, and invest in future growth.

Long-term Liabilities

Long-term liabilities are obligations that are due beyond one year. They are an important part of a company's financial makeup and are often used to fund significant investments, like purchasing equipment or real estate.
Examples of long-term liabilities include bonds payable and long-term loans. These instruments provide companies with immediate cash, but they also obligate the business to future payments, affecting future cash flow.
Long-term liabilities are considered financing activities on the cash flow statement. For example, an increase in bonds payable is a source of cash flow under financing activities. This cash inflow increases a company's financial resources temporarily, helping to finance its broader initiatives or pay off shorter liabilities. However, businesses must manage these obligations carefully, ensuring they have enough cash over time to meet their commitments without straining resources.

Equity Transactions

Equity transactions involve the raising or distribution of a company's earnings among its shareholders. Equity represents what is left for shareholders after all liabilities have been paid. Issuing new shares of stock are equity transactions that increase the cash available to a company. This action can be used for expansion, paying down debt, or investing in new projects.
Meanwhile, paying dividends to shareholders is an equity transaction that reduces a company's cash reserves. It is a reward to shareholders but also represents money that isn't being reinvested into the company.
A thorough analysis of equity transactions helps investors understand how a business is funding itself: whether it is relying more on debt or equity, and how it is distributing its earnings. This balance affects a company's risk level and perceived financial stability, which can influence investment decisions.