Point: Financing activities generally refer to changes in the noncurrent liability and the equity accounts. Examples are (1) receiving cash from issuing debt or repaying amounts borrowed and (2) receiving cash from or distributing cash to owners.
Notes Payable Transactions The first stage in analysis of notes is to review the comparative balance sheets from Exhibit 16.10. This analysis reveals an increase in notes payable from $64,000 to $90,000.
The second stage explains this change. Item e of the additional information for Genesis (page 639) reports that notes with a carrying value of $34,000 are retired for $18,000 cash, resulting in a $16,000 gain. The reconstructed entry for analysis of item e follows:
This entry reveals an $18,000 cash outflow for retirement of notes and a $16,000 gain from comparing the notes payable carrying value to the cash received. This gain does not reflect any cash inflow or outflow. Also, item b of the additional information reports that Genesis purchased plant assets costing $70,000 by issuing $60,000 in notes payable to the seller and paying $10,000 in cash. We reconstructed this entry when analyzing investing activities: It showed a $60,000 increase to notes payable that is reported as a noncash investing and financing transaction. The Notes Payable account reflects (and is fully explained by) these reconstructed entries as follows:
The third stage is to report the cash flow effect of the notes retirement in the financing section of the statement as follows (also see Exhibit 16.7 or 16.11):
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