Question

Granite Inc. is a calendar year corporation. On October 1, Year 1, Granite pays a $6,000...

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? ______________________

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Answer #1
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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