On January 1, Year XXX1, Holmes Co. borrowed cash from Legacy Bank by issuing an
ID: 2374737 • Letter: O
Question
On January 1, Year XXX1, Holmes Co. borrowed cash from Legacy Bank by issuing an $80,000 face value, three-year term note that had a 7% annual interest rate. The note is to be repaid by making annual payments of $30,484 that include both interest and principal on December 31 beginning Year XXX1. Holmes Co. invested the proceeds from the loan in land that generated lease revenue of $40,000 cash per year. Required: a) Prepare an amortization schedule for the $80,000 note for the three year period (i.e. show the amount applied towards interest and the amount applied to the principal for each of the four payments that Homes Co makes to Legacy Bank). Round off all calculations to the nearest dollar. b) Prepare an income statement for each of the three years; prepare a balance sheet as of December 31for each of the three years (Years XXX1 through XXX3). Assume that Homes started business on January 1, Year XXX1 by issuing common stock for $1,000 cash. c) Does cash outflow from operating activities change or remain constant each year? Why?Explanation / Answer
C) Cash flow from operating activities is generally calculated according to the following formula:
Cash Flow from Operating Activities = Net income + Noncash Expenses + Changes in worrking Capital
The noncash expenses are usually the despreciation and/or amortization expenses listed on the firm's income statement.
A statement of cash flows typically breaks out a company's cash sources and uses for the period into three categories: cash flows from operations, cash flows from investing activities, and cash flows from financing activities. Cash flows from operations primarily measures the cash-generating abilities of the company's core operations rather than from its ability to raise capital or purchase assets.
Because working capital is a component of cash flow from operations, investors should be aware that companies can influence cash flow from operating activities by lengthening the time they take to pay the bills (thus preserving their cash), shortening the time it takes to collect what%u2019s owed to them (thus accelerating the receipt of cash), and putting off buying inventory (again thus preserving cash). It is also important to note that companies also have some leeway about what items are or are not considered capital expenditures, and the investor should be aware of this when comparing the cash flow of different companies.