Question

During 20X1, Craig Company had the following transactions:

A.	Purchased $300,000 of 10-year bonds issued by Makenzie Inc.
B.	Acquired land valued at $105,000 in exchange for machinery.
C.	Sold equipment with original cost of $810,000 for $495,000; accumulated depreciation taken on the equipment to the point of sale was $270,000.
D.	Purchased new machinery for $180,000.
E.	Purchased common stock in Lemmons Company for $82,500.

	Required:
1.	Prepare the net cash from investing activities section of the statement of cash flows.
2.	CONCEPTUAL CONNECTION Usually, the net cash from investing activities is negative. How can Craig cover this negative cash flow? What other information would you like to have to make this decision?

Answer 1

1.

CRAIG COMPANY

CASH FLOW STATEMENT

Particulars	Amount($)
Cash Flow from Investing Activities :
(A) Purchase of 10 year Bond	(3,00,000)
(B) Acquired land for exchange for machinery	-
(C) Sale of equipment	4,95,000
(D) Purchase of new machinery	(1,80,000)
(E) Purchase of Common stock	(82,500)
Net Cash used in Investing activities	(67,500)

Note : (B) Acquisition of land for exchange for machinery will not affect cash flow statement.

(C) Original cost and accumulated depreciation are immaterial in preparation of cash flow statement.

2.Usually net cash from investing activities is negative. Cash flow from investing activities contain purchase and sale of fixed asset. When Craig buy any fixed asset during the period, it affects the cash flow negatively because there is an out flow of cash from the company.

Every companies and investors usually want to see positive cash flows from all of the company's operations. Having negative cash flow from investing activities is not always bad for it. If it is a growing company and decides to invest in long term fixed asset it will shows a decrease in cash flow from investing activities. Hence positive Cash flow from operating activities and financing activities can cover the negative cash flow from investing activities.