Granite Inc. is a calendar year corporation. On October 1, Year 1, Granite pays a $6,000 premium for casualty insurance on its headquarters office. The policy covers the 12-month period ending September 30, Year 2.
a. What is the effect of the premium payment on Granite’s: Operating income Year 1? _________
Cash provided by operating activities in Year 1? _________________
Operating income Year 2? __________________
Cash provided by operating activities in Year 2? _____________
b. Assume Granite renews the policy on October 1, Year 2, at the same premium amount of $6,000.What is the statement of cash flows adjustment in Year 2? ______________________
Premium paid | $6,000 | |||
Per month premium expense | $500 | (6,000/12) | ||
a | Year 1 | 3 months | ||
Effect on operating income year 1 | -$1,500 | Operating income will reduce by $1500 in year 1 | ||
Cash provided by operating activities | -$6,000 | Cash provided by operating activities will decrease by $6000 | ||
Year 2 | ||||
Operating income effect | -4500 | (500*9) | Operating income in year 2 will decrease by $4500 | |
Cash provided by operating activities | 0 | No effect in cash provided by operating activities in year 2 | ||
b | Effect on cashflow on year 2 | -6000 | (cash will decrease by $6,000 if insurance renewed in year 2) |
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