Buck’s Dilemma

Case 13

Buck’s Dilemma: Gross or Net?

Buck’s Hunting Equipment Inc. (“Buck”) is a retailer of hunting equipment, hunting

apparel, and outdoor accessories. Buck’s operations are based in Pittsburgh, PA, with

retail stores located in the nearby suburbs and throughout southwestern Pennsylvania.

Buck is actively developing opportunities to expand its operations in the surrounding

region, including construction of several new retail stores in West Virginia and southern

Ohio. Buck intends to complete construction and open each of the new stores over the

next three years. Buck anticipates incurring significant expenses and making short-term

cash outlays during the construction phase of the expansion. As a result of this growing

need to obtain new, readily available capital, Buck entered into a three-year revolving

line of credit (the “Facility”) with its bank on January 1, 2010. The line of credit has a

maximum borrowing capacity of $100 million.

Since Buck has not previously used a revolving line of credit, it does not have knowledge

of the relevant accounting literature and guidance on how to present the related cash

flows in its financial statements. Accordingly, as Buck’s external auditor, management

has asked for your assistance in determining the appropriate presentation of the

borrowing and payment activity within its statement of cash flows for the year ended

December 31, 2010.

Required:

1. Should Buck present the borrowing and payment activity related to its revolving

line of credit as cash flows from operating, investing, or financing activities?

2. For each of the following scenarios, on the basis of the specific facts and

circumstances, determine whether Buck should present its borrowing and

payment activity under the Facility on a net or gross basis within the financing

activities section of its statement of cash flows.

Scenario 1:

•

•

•

•

•

The line of credit has a maximum borrowing capacity of $100 million, and

under the...