Problem -
Go With the Flow Inc. (the Company) designs, manufactures, and sells a broad range of mobile network products and systems and communication devices, including mobile, cordless, and corded telephones. The Company's primary sources of liquidity are internally generated cash flows, the Company's debt and revolving credit facilities, and the sale of trade accounts receivables. The Company's liquidity and capital requirements are primarily a function of its working capital needs, capital expenditures, and debt service requirements. The Company has the following transactions that need to be analyzed under ASC 230, Statement of Cash Flows (formerly FASB Statement No. 95, Statement of Cash Flows).
1. Insurance Settlement Proceeds The Company reached a settlement with its insurance carrier related to a claim from a tornado that destroyed one of the Company's manufacturing facilities. During the year, the Company received proceeds of $20 million from its insurance carrier in connection with its claim for reimbursement for the destroyed building. The Company plans to use the insurance proceeds to fund its defined-benefit pension plan, rather than to rebuild the destroyed facility. Alternative 1 The insurance settlement proceeds should be classified as an investing cash inflow in the statement of cash flows. Alternative 2 Because of its intended use (an operating activity), the insurance settlement proceeds should be classified as an operating cash inflow in the statement of cash flows.
2. Acquisition of Property, Plant, and Equipment on Account In December, the Company incurred $12 million of capital expenditures related to the acquisition of manufacturing equipment and machinery.
The terms of the invoice are 2%/15, net 45. The amounts were unpaid as of year-end (i.e., included in the accounts payable balance). The Company intends to pay the invoice in early January, in accordance with the terms of the invoice. Alternative 1 The acquisition of property, plant, and equipment on account should be presented as an investing cash outflow in the statement of cash flows.
Alternative 2 The acquisition of property, plant, and equipment on account should not be reflected in the statement of cash flows until actual payments have been made.
Required: Determine the appropriate cash flow statement treatment for (1) classification, (that is, operating, investing, financing) and (2) timing, if applicable, for the above transactions.
2 pages