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In the Consolidated Statement of Cash Flows, Fairfield Communities, Inc. reported the following items in the...

In the Consolidated Statement of Cash Flows, Fairfield Communities, Inc. reported the following items in the Investing Activities Section: • Principal collections on receivables • Originations of receivables • Sale of receivables to qualifying special purpose entities. Do you agree on the classification of these items as Investing Activities? Explain you answer. If you disagree on the classification, under which activity do you think they should be classified? Explain your answer.

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Expert Solution

I do not agree on classification of following items in Investing Activities Section:

1. Principal Collections on receivables.

2. Originations of receivables.

3. Sale of receivables to qualifying Special Purpose Entities (SPE).

Reason being, Receivables are considered current assets and cash inflow and outflow from receivables is classified under Operating activities. Only those items are classified under Investing activities which are considered long term assets and held by the company for long term i.e. 1 year or more.

Receivables are more being considered as current assets cannot be classified under investing activities. It should be classified under Operating activities.

Operating activities are those activities that includes cash generated from core business. Receivables arise from day-to-day activities of business and hence cash generated from receivables should be classified under operating activities.

Investing activities include purchase of physical fixed assets, investment in securities or sale of securities or fixed assets. Receivables being classified as current assets cannot be considered under Investing activity.

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Thank you.

ekkarill92 answered 2 years ago
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