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Question 1: What are the feasible classifications in the statement of cash flows in the Company’s December 31, 2010, financial statements for its purchase of 2012 EAs from Clean Air Corp? Provide the logic for each alternative and indicate which alternative you believe is best and why.

In regards to the information given in the Polluter case, there are several ways the company can classify the $3 million purchase of emission allowances (“EAs”) from Clean Air Corp. First, it is important to understand the Polluter’s intention for the EAs and nature of their ‘business.’ In order to understand what are the “feasible alternative classifications in the statement of cash flows” for the $3 million purchase, Polluter will determine what type of asset they will classify the EAs as on their balance sheet. Following are three alternatives Polluter can consider as outlined in Deloitte’s “Accounting for Emission Rights” paper: 1. The EAs are intangible assets as defined under SFAS No. 142, Goodwill and Other Intangible Assets, because they lack physical substance but do not meet the definition of a financial asset under SFAS 140. 2. EAs are listed as financial assets because markets and exchanges for the trading of EAs provided evidence that they qualified as financial assets as the allowances would be readily convertible to cash. 3. An alternative view is that they are listed as inventory, as they are part of the necessary costs to comply with environmental regulations and emissions reduction schemes.
Polluter currently has significantly high levels of greenhouse gas pollution, which are emitted throughout their normal course of business operations. As stated in the case, Polluter purchased the EAs from Clean Air in April of 2010 to meet its need for additional EAs. Therefore, the EAs acquired in the sale are not classified as financial assets because their…...

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