Question

Acme Inc. is a retailer of sporting goods equipment and apparel. Acme’s operations are based in Des Moines, Iowa with retail stores located in the nearby suburbs and throughout Iowa. Acme is actively developing opportunities to expand its operations in the surrounding region, including construction of several new retail stores in North and South Dakota. Acme intends to complete construction and open each of the new stores over the next three years. Acme anticipates incurring significant expenses and making short-term cash outlays during the construction phase of the expansion. As a result of this growing need to obtain new, readily available capital, Acme entered into a three-year revolving line of credit (the “Line of credit”) with its bank on January 1, 2017. The line of credit has a maximum borrowing capacity of $100 million.

Since Acme has not previously used a revolving line of credit, it does not have knowledge of the relevant accounting literature and guidance on how to present the related cash flows in its financial statements. Accordingly, as Acme’s external auditor, management has asked for your assistance in determining the appropriate presentation of the borrowing and payment activity within its statement of cash flows for the year ended December 31, 2017.

Required:

1. Should Acme present the borrowing and payment activity related to its revolving

line of credit as cash flows from operating, investing, or financing activities? (Cite any Codification references that serve as justification for your answer)

2. For each of the following scenarios, on the basis of the specific facts and

circumstances, determine whether Acme should present its borrowing and

payment activity under the Line of credit on a net or gross basis within the financing activities section of its statement of cash flows. (Cite any Codification references that serve as justification for your answer)

Scenario 1:

• The line of credit has a maximum borrowing capacity of $100 million, and

under the terms of the agreement, all draws are considered to be due on

demand.

• On July 15, 2017, Acme drew $60 million on the Line of credit.

• On August 30, 2017, Acme drew an additional $40 million on the Line of credit.

• On September 30, 2017, Acme paid down the draws by $50 million.

• Assume the volume of transactions is considered to be large.

Scenario 2:

• The line of credit has a maximum borrowing capacity of $100 million, and

under the terms of the agreement, specific maturity terms will be negotiated

by Acme and the bank after each draw on the Line of credit.

• On June 15, 2017, Acme drew $60 million, and signed a note to repay the full

amount borrowed by December 15, 2017.

• On September 30, 2017, Acme drew an additional $40 million, and signed a

note to repay the full amount borrowed by December 1, 2018.

• On December 15, 2017, Acme paid $60 million to the bank related to the first

draw.

• Assume the volume of the transactions is considered to be large.

Scenario 3:

• The line of credit has a maximum borrowing capacity of $100 million.

Individual draws on the Line of credit do not contain specific maturity dates, other than the entire amount outstanding under the Line of credit becomes due at the end of the three-year term.

• On June 30, 2017, Acme drew $70 million on the Line of credit.

• On September 30, 2017, Acme drew an additional $15 million on the Line of credit.

• On November 30, 2017, Acme drew the remaining $15 million available under

the Line of credit.

• On December 15, 2017, Acme made a payment of $50 million related to the

outstanding balance.

• Assume the volume of the transactions is considered to be large.

Answer 1

1)

There are 3 exercises as Operating, Investing and Financing exercises.

Working exercises are exercises identified with total compensation of business as money created from business related exercises.

Contributing exercises are exercises identified with sources of income from interest in capital resources.

Financing exercises are identified with the expansion in organization's capital. These exercises prompts change in capital and borrowings of the business or firm. It incorporates exercises, for example, obtaining of credit, reimbursing to speculators, money got from issue fo debentures, and so on.

Summit Inc. has gone into multi year credit extension with Bank for most extreme getting utmost of $100 million for the development of new retail locations in the encompassing district for the development of firm. It is in the same class as getting of advance from bank for constrained timeframe. In this manner Acme Inc. should show it's acquiring and installment action identified with it's spinning of credit extension as Financing action as Acme Inc. has assumed line of praise office as getting reserves.

Be that as it may, when the firm or business is exchanging as bank, agent, and so on then these exercises of getting will be treated as working exercises in light of the fact that these are identified with it's the same old thing.

Thus obtaining and installment exercises identified with credit extension are Financing exercises of Acme Inc.

2)

Situation 1

In the principal situation, as Acme's income articulation is to be set up for the year finished 31st December, 2017, it's financing exercises are introduced on a net premise in capital explanation. Since all exercises are done before 31st december,2017 and all are expected on interest

Cashflow Statement for the year ended 31^st December,201

-

Particulars	Amount
Proceeds from loan of credit on July 15	$ 60 million
Proceeds from loan of credit on Aug 30	$ 40 million
Payment of draws on Sept. 30	($ 50 million)
Total cash flows from financing activities	$ 50 million

Situation 2

In this Acme needs to introduce it on net premise also. In any case, if there should arise an occurrence of understanding between Acme and Bank, regardless of whether Acme has marked a not to reimburse the sum on determined date, it won't be treated as income. Since just by marking a note to reimburse the sum does not appear to be real income leaving business. Subsequently just money which is really being paid or gotten will be thought about while showing capital explanation.

Income Statement for the year finished 31st December,2017

Particulars	Amount
Proceeds from line of credit on June 15	$ 60 million
Proceeds from line of credit on Sept 30	$ 40 million
Payment of first draw on Dec 15	($ 60 million)
Total Cashflows from Financing Activities	$ 40 million

Scenario 3)

Maturity dates and amount outstanding at the year end does not lead to actual payment of debt. Hence only actual cash receipt and payment will be considered for cashflow statement on net basis.

Particulars	Amount
Proceeds on June 30	$ 70 million
Proceeds on Sept 30	$ 15 million
Proceeds on Nov 30	$ 15 million
Payment on Dec 15	($ 50 million)

Total Cashflows from financing activities $ 50 million.