Chapter 14: Q14-15RQ (page 769)
Question: How does the direct method differ from the indirect method when preparing the operating activities section of the statement of cash flows?
Answer
The direct method is like astatement of profit and loss whereas, the indirect method uses balance sheet items to get results.
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Question: If current liabilities increase, what is the effect on cash? What about a decrease in current liabilities?
Question: Classifying items on the statement of cash flows Cash flow items
must be categorized into one of four categories. Identify each item as operating (O), investing (I), financing (F), or non-cash (N).
a. Cash purchase of merchandise inventory
b. Cash payment of dividends
c. Cash receipt from the collection of long-term notes receivable
d. Cash payment for income taxes
e. Purchase of equipment in exchange for notes payable
f. Cash receipt from the sale of land
g. Cash received from borrowing money
h. Cash receipt for interest income
i. Cash receipt from the issuance of common stock
j. Cash payment of salaries
Preparing a statement of cash flows using the direct method Jelly Bean, Inc. began 2018 with cash of \(58,000. During the year, Jelly Bean earned revenue of \)595,000 and collected \(614,000 from customers.Expenses for the year totaled \)427,000, of which Jelly Bean paid \(212,000 in cash to suppliers and \)205,000 in cash to employees. Jelly Bean also paid \(148,000 to purchase equipment and a cash dividend of \)57,000 to its stockholders during 2018. Prepare the company’s statement of cash flows for the year ended December 31, 2018. Format operating activities by the direct method.
Identify each item as operating (O), investing (I), financing (F), or non-cash (N).
1. Cash receipt from the sale of equipment
2. Cash payment for salaries
3. Cash receipt from the collection of long-term notes receivable
4. Purchase of equipment in exchange for notes payable
5. Cash receipt from the issuance of common stock
The comparative balance sheet of Jackson Educational Supply at December 31, 2018, reported the following:
| 2018 | 2017 | |
| Current | Assets: | |
| Cash | \( 87,700 | \) 23,500 |
| Accounts Receivable | 15,300 | 22,000 |
| Merchandise Inventory | 62,600 | 60,400 |
| Current | Liabilities: | |
| Accounts Payable | 28,100 | 26,100 |
| Accrued Liabilities | 10,600 | 11,300 |
Jackson’s transactions during 2018 included the following:
Payment of cash dividends \( 16,200
Depreciation expense \) 16,700
Purchase of equipment with cash 54,700
Purchase of building with cash 98,000
Issuance of long-term notes payable to borrow cash 48,000
Net income 57,600
Issuance of common stock for cash 105,000
Requirements
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