Question

Mead Motors purchases an automobile for its new car inventory from Generous Motors, which finances this transaction through its financial subsidary, Generour Motors Credit COmpany. Mead pays no funds to Generous Motors or GMCC untio it sells the automobile. Mead must then repay the balance of the loan plus interest to GMCC. How should Mead report the acquistion and repayment transcations in its Statemednt of Cash Flows?

Briefy restate the facts of the case. Identify the issue. State the issue in the form of a research question. Give a short answer to the issue. Cite the ASC authority for your answer. Explain the authority and apply it to the facts to discuss your reasoning to arrive at the answer.

Answer 1

Solution:-

Fact of the case

Mead Motors purchase an automobile for its new car inventory from Generous Motors, which finances the transaction through it financial subsidiary, GMCC. Mead pays no funds to GM or GMCC until it sells the automobile. Mead should repay the balance of the loans plus interest to GMCC.

Problem Identification: How should a company report, if at all, cash and non-cash transactions owed to an entity’s financial subsidiary?  

Keywords: Cash flows; financ* subsidiaries; operating income.

Short Answer

As per ASC – 230-10-50-5In the above case, Mead Motors purchase an automobile using financing from GMCC and he pays only after the sale. Some transactions are part cash and part noncash; only the cash portion shall be reported in the statement of cash flows.

Citation of FASB ASC

230-10-45-14 Statement of Cash Flows, Overall, Other Presentation Matters. All of the following are cash outflows for operating activities:

Cash payments to acquire materials for manufacture or goods for resale, including principal payments on accounts and both short- and long-term notes payable to suppliers for those materials or goods. The term goods include certain loans and other debt and equity instruments of other entities that are acquired specifically for resale, as discussed in paragraph 230-10-45-21.

Conclusion: Per ASC 230-10-50-5), Mead should exclude transactions that involve no cash payments or receipts. However, per 230-10-45-17, it should record cash payments to GMCC for repayments of principle (and interest thereon) due to suppliers or their subsidiaries as operating cash (out) flows.