In the debt-financed factory purchase example, which items appear on the Cash Flow Statement in the first year?

In the debt-financed factory purchase example, which items appear on the Cash Flow Statement in the first year?

• A. CapEx of 100 and debt issuance of 100 as offsetting items on the CFS, leaving no net cash change.
• B. Only CapEx appears on the CFS.
• C. Only debt issuance appears on the CFS.
• D. Neither CapEx nor debt issuance appears on the CFS.

Answer: (A)

The main idea tested is that the Cash Flow Statement records cash movements by activity, not just a single net sum. When a factory is bought with debt, you spend cash for the asset—this is a cash outflow in investing activities (CapEx). At the same time you raise cash by issuing debt—this is a cash inflow in financing activities (debt issuance). In the first year, both events occur, so the Cash Flow Statement shows both items. If the amounts are equal, they offset to a net cash change of zero for the year, even though there are two separate cash flows: an outflow for the investment and an inflow from financing. The balance sheet would reflect the same financing structure: assets up by the purchase price and liabilities up by the debt, with cash unchanged.

The main idea tested is that the Cash Flow Statement records cash movements by activity, not just a single net sum. When a factory is bought with debt, you spend cash for the asset—this is a cash outflow in investing activities (CapEx). At the same time you raise cash by issuing debt—this is a cash inflow in financing activities (debt issuance). In the first year, both events occur, so the Cash Flow Statement shows both items. If the amounts are equal, they offset to a net cash change of zero for the year, even though there are two separate cash flows: an outflow for the investment and an inflow from financing. The balance sheet would reflect the same financing structure: assets up by the purchase price and liabilities up by the debt, with cash unchanged.