Question

Madison Company issued an interest-bearing note payable with a face amount of $30,600 and a stated interest rate of 8% to the Metropolitan Bank on August 1, Year 1. The note carried a one-year term.
a. The amount of cash flow from operating activities on the 2016 statement of cash flows would be:________
b. Based on this information alone, the amount of total liabilities appearing on Madison's Year 1 balance sheet would be:________

Answer 1

Answer:

a. $0

b.  $31,620

Explanation:

a. Notes Payable do not fall under Operating activities in the cashflow statement but rather under Financing Activities which is where cash transactions that provide the business with capital and liability funds are accounted for.

The Operating activity balance from this is therefore $0.

b. The liabilities will include the Note and the interest accumulated at year end.

Interest accumulated = 30,600 * 8% * 5/12 months = $1,020

Liabilities = 30,600 + 1,020 = $31,620