Question

ACTG 4650

Assignment 6

Due April 9

Acme Inc. is a retailer of sporting goods equipment and apparel. Acme’s operations are based in Des Moines, Iowa with retail stores located in the nearby suburbs and throughout Iowa. Acme is actively developing opportunities to expand its operations in the surrounding region, including construction of several new retail stores in North and South Dakota. Acme intends to complete construction and open each of the new stores over the next three years. Acme anticipates incurring significant expenses and making short-term cash outlays during the construction phase of the expansion. As a result of this growing need to obtain new, readily available capital, Acme entered into a three-year revolving line of credit (the “Line of credit”) with its bank on January 1, 2017. The line of credit has a maximum borrowing capacity of $100 million.

Since Acme has not previously used a revolving line of credit, it does not have knowledge of the relevant accounting literature and guidance on how to present the related cash flows in its financial statements. Accordingly, as Acme’s external auditor, management has asked for your assistance in determining the appropriate presentation of the borrowing and payment activity within its statement of cash flows for the year ended December 31, 2017.

Required:

1.         Should Acme present the borrowing and payment activity related to its revolving

            line of credit as cash flows from operating, investing, or financing activities? (Cite any Codification references that serve as justification for your answer)

2.         For each of the following scenarios, on the basis of the specific facts and

            circumstances, determine whether Acme should present its borrowing and

payment activity under the Line of credit on a net or gross basis within the financing activities section of its statement of cash flows. (Cite any Codification references that serve as justification for your answer)

Scenario 1:

            • The line of credit has a maximum borrowing capacity of $100 million, and

                under the terms of the agreement, all draws are considered to be due on

                demand.

            • On July 15, 2017, Acme drew $60 million on the Line of credit.

            • On August 30, 2017, Acme drew an additional $40 million on the Line of credit.

            • On September 30, 2017, Acme paid down the draws by $50 million.

            • Assume the volume of transactions is considered to be large.

Scenario 2:

            • The line of credit has a maximum borrowing capacity of $100 million, and

               under the terms of the agreement, specific maturity terms will be negotiated

               by Acme and the bank after each draw on the Line of credit.

            • On June 15, 2017, Acme drew $60 million, and signed a note to repay the full

               amount borrowed by December 15, 2017.

            • On September 30, 2017, Acme drew an additional $40 million, and signed a

                note to repay the full amount borrowed by December 1, 2018.

            • On December 15, 2017, Acme paid $60 million to the bank related to the first

               draw.

            • Assume the volume of the transactions is considered to be large.

Scenario 3:

            • The line of credit has a maximum borrowing capacity of $100 million.

Individual draws on the Line of credit do not contain specific maturity dates, other than the entire amount outstanding under the Line of credit becomes due at the      end of the three-year term.

            • On June 30, 2017, Acme drew $70 million on the Line of credit.

• On September 30, 2017, Acme drew an additional $15 million on the Line of credit.

            • On November 30, 2017, Acme drew the remaining $15 million available under

               the Line of credit.

            • On December 15, 2017, Acme made a payment of $50 million related to the

               outstanding balance.

            • Assume the volume of the transactions is considered to be large.

Answer 1

1)

There are 3 activities as Operating, Investing and Financing activities.

Operating activities are activities related to net income of business as cash generated from business related activities.

Investing activities are activities related to cashflows from investment in capital assets.

Financing activities are related to the increase in company's capital. These activities leads to change in capital and borrowings of the business or firm. It includes activities such as borrowing of loan, repaying to investors, cash received from issue fo debentures, etc.

Acme Inc. has entered into 3 year line of credit with Bank for maximum borrowing limit of $100 million for the construction of new retail stores in the surrounding region for the expansion of firm. It is as good as borrowing of loan from bank for limited period of time. Therefore Acme Inc. should present it's borrowing and payment activity related to it's revolving of line of credit as Financing activity as Acme Inc. has taken line of credit facility as borrowing funds.

But when the firm or business is trading as creditor, financier, etc. then these activities of borrowing will be treated as operating activities because these are related to it's business.

Hence borrowing and payment activities related to line of credit are Financing activities of Acme Inc.

2)

Scenario 1)

In the first scenario, as Acme's cash flow statement is to be prepared for the year ended 31^st December, 2017, it's financing activities are presented on a net basis in cashflow statement. Because all activities are carried out before 31^st december,2017 and all are due on demand.

Cashflow Statement for the year ended 31^st December,201

Particulars	Amount
Proceeds from loan of credit on July 15	$ 60 million
Proceeds from loan of credit on Aug 30	$ 40 million
Payment of draws on Sept. 30	($ 50 million)
Total cash flows from financing activities	$ 50 million

Scenario 2)

In this Acme needs to present it on net basis as well. But, in case of agreement between Acme & Bank, even if Acme has signed a not to repay the amount on specified date, it will not be treated as cashflow. Because just by signing a note to repay the amount does not seem to be actual cashflow going out of business. Hence only cash which is actually being paid or received will be taken into consideration while presenting cashflow statement.

Cashflow Statement for the year ended 31^st December,2017

Particulars	Amount
Proceeds from line of credit on June 15	$ 60 million
Proceeds from line of credit on Sept 30	$ 40 million
Payment of first draw on Dec 15	($ 60 million)
Total Cashflows from Financing Activities	$ 40 million

Scenario 3)

Maturity dates and amount outstanding at the year end does not lead to actual payment of debt. Hence only actual cash receipt and payment will be considered for cashflow statement on net basis.

Particulars	Amount
Proceeds on June 30	$ 70 million
Proceeds on Sept 30	$ 15 million
Proceeds on Nov 30	$ 15 million
Payment on Dec 15	($ 50 million)

Total Cashflows from financing activities $ 50 million.