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If a company has a revolving line of credit that they are actively using by borrowing money and making repayments during...

If a company has a revolving line of credit that they are actively using by borrowing money and making repayments during the year, under what circumstances would it be acceptable to report a net amount for the borrowing and repayment activity associated with the line of credit when preparing the Cash Flow Statement? Please explain.

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Answer #1

When a company has a revolving line of credit it will be most appropriate to report on a net basis in the following circumstances:

1. if the turnover of the cash is high

2. The borrowing period is less

3. The sum borrowed is huge

The reason being if the sum borrowed is higher it will be appropriate on a net basis to show effect of net outflow/ inflow of cash to make better financing decision and more useful for investors. Also, if the cash turnover is high the net cash flow will show better picture of the financials.

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