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Parent Inc. purchased 30% of the common stock of Affiliate Co. on January 1, YR01 for $5,000 and appropriately accounted for this investment using the Equity Method. For the year ended December 31, YR01, Affiliate Co. reported net income of $1,000. Also, during YR01 the company declared and paid cash dividends totaling $200 to holders of its common stock. Given these facts, how will the Operating, Investing, and Financing sections of the statement of cash flows for Parent Inc. be affected (assume use of the indirect method of presentation)

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Answer:

net cash from investing activities = -$4,940

operating and financing activities are not affected.

Explanation:

the journal entries should be:

January 1, socks purchased

Dr Investment in Affiliate 5,000

    Cr Cash 5,000

December 31, dividends received

Dr Cash 60

    Cr Investment in Affiliate 60

December 31, Affiliate reports net income

Dr Investment in Affiliate 300

    Cr Revenue from investing activities 300

Only the cash flow from investing activities will be affected by Parent's investing in Affiliate. Since the company uses the equity method, the operating and financing cash flows are not affected.

The cash flow from investing activities will:

  • Decrease by $5,000 due to the purchase of stocks.
  • Increase by $60 due to the dividends received.
  • net cash from investing activities = -$4,940

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