Question

State with reason whether Purchase of fixed asset on long term deferred payment would
result in inflow, outflow or no flow of cash.

Answer 1

Purchase of fixed asset in long term deferred payment just means that you are buying a fixed asset through borrowings.

Suppose if you are buying a machinery by raising debt from the public by way of debentures, you would have an inflow because of the money raised by way of debentures . But this inflow would result in an outflow when you will ultimately pay the money to buy the machinery.

WARNING: But don't consider this as no flow of cash.

You'll have to subtract the purchase of machinery in the cash flow from investing activities as PURCHASE OF FIXED ASSET.

And in the Financing activities you'll have to add the money raised by the issue of debentures as PROCEEDS FROM ISSUE OF DEBENTURES.

This would nullify the effect of both inflow and outflow but still you have to mention these in the CASH FLOW STATEMENT.

Answer 2

Explanation:

Purchase of Fixed assets on long-term deferred payment means fixed assets are purchased against long-term deferred liabilities.

The Journal entry for this transaction would be:

Fixed Assets A/c Dr.

To Fixed Liabilities A/c

Therefore, from the above Journal entry we can see that there is no effect on the Cash Flow Position of the business.