Financing Cash Flows: Analysis of Equity

The Genesis information reveals two transactions involving equity accounts. The first is the issuance of common stock for cash. The second is the declaration and payment of cash dividends. We analyze both.

Common Stock Transactions  The first stage in analyzing common stock is to review the comparative balance sheets from Exhibit 16.10, which reveal an increase in common stock from $80,000 to $95,000.

The second stage explains this change. Item d of the additional information (page 639) reports that 3,000 shares of common stock are issued at par for $5 per share. The reconstructed entry for analysis of item d follows:


This entry reveals a $15,000 cash inflow from stock issuance and is reflected in (and explains) the Common Stock account as follows:


The third stage discloses the cash flow effect from stock issuance in the financing section of the statement as follows (also see Exhibit 16.7 or 16.11):


Retained Earnings Transactions  The first stage in analyzing the Retained Earnings account is to review the comparative balance sheets from Exhibit 16.10. This reveals an increase in retained earnings from $88,000 to $112,000.

The second stage explains this change. Item f of the additional information (page 639) reports that cash dividends of $14,000 are paid. The reconstructed entry follows:


This entry reveals a $14,000 cash outflow for cash dividends. Also see that the Retained Earnings account is impacted by net income of $38,000. (Net income was analyzed under the operating section of the statement of cash flows.) The reconstructed Retained Earnings account follows:


Point: Financing activities not affecting cash flow include declaration of a cash dividend, declaration of a stock dividend, payment of a stock dividend, and a stock split.

The third stage reports the cash flow effect from the cash dividend in the financing section of the statement as follows (also see Exhibit 16.7 or 16.11):


Global: There are no requirements to separate domestic and international cash flows, leading some users to ask, “Where in the world is cash flow?”

We now have identified and explained all of the Genesis cash inflows and cash outflows and one noncash investing and financing transaction. Specifically, our analysis has reconciled changes in all noncash balance sheet accounts.