Case 13-02

Buck’s Dilemma: Gross or Net?

Background
Buck’s Hunting and Equipment Inc. (Buck) has determined that it’s time to expand their retail operations. Buck is planning to build several retail stores over the next three years. In order execute their plan, Buck entered into a $100 million, three-year revolving line of credit (the Facility) with their bank on January 1, 2010.
Buck and his auditor and management would like to know how to book presentation of cash flows through the use of a revolving line of credit is whether to report the amounts borrowed and repaid on a net basis or on a gross basis. FASB’s Accounting Standards Codification 230-10-45-7 states “information about the gross amounts of cash receipts and cash payments during a period is more relevant than information about the net amounts of cash receipts and payments.” (FASB, ASC 230-10-45-7). However it is often enough to report the net amount of these cash receipts and payments. ASC 230-10-45-8 states that net presentation if appropriate when there is a quick turnover with large amounts and short maturities.

Solution 1 — Classification with the Statement of Cash Flows
Buck should present the borrowing and payment activity as a cash flow from financing activities. ASC 230-10-45-14 states that “proceeds from issuing bonds, mortgages, notes, and from other short- or long-term borrowing” are a cash inflow from financing activities. Similarly, ASC 230-10-45-15 states that “repayments of amounts borrowed” are a cash outflow for financing activities. For these reasons Buck should present the borrowing and payment activity related to its revolving line of credit as cash flows under financing activities.
Solution 2 — Gross versus net presentation
Scenario 1
The first case involves the $100 million borrowing capacity with all draws from the line of credit being due on demand. Buck