Looking forward to next year, if Chester’s current cash amount is $19,378 (000)

Question

Looking forward to next year, if Chester’s current cash amount is $19,378 (000) and cash flows from operations next period are unchanged from this period and Chester takes ONLY the following actions relating to cash flows from investing and financing activities:

Issues $2,000 (000) of long-term debt
Pays $4,000 (000) in dividends
Retires $10,000 (000) in debt

Which of the following activities will expose Chester to the most risk of needing an emergency loan? Select: 1 Issues 100 (000) shares of common stock Purchases assets at a cost of $15,000 (000) Sells $7,000 (000) of long-term assets Repurchases $10,000 (000) of stock Looking forward to next year, if Chester’s current cash amount is $19,378 (000) and cash flows from operations next period are unchanged from this period and Chester takes ONLY the following actions relating to cash flows from investing and financing activities:

Issues $2,000 (000) of long-term debt
Pays $4,000 (000) in dividends
Retires $10,000 (000) in debt

Which of the following activities will expose Chester to the most risk of needing an emergency loan? Select: 1 Issues 100 (000) shares of common stock Purchases assets at a cost of $15,000 (000) Sells $7,000 (000) of long-term assets Repurchases $10,000 (000) of stock

Explanation / Answer

Answer: Option (B) - Purchases assets at a cost of $15,000 (000)

Explanation: Purchasing asset at a cost of $15,000 (000) is an activity that will expose Chester to the most risk of needing an emergency loan. This is because buying assets is a long term obligation and requires loan to pay the value of the assets. Also, Chester only have $19,378 (000) with him which is not a sufficient amount given his financial decisions involving issuing debts and paying dividends.

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