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Chapter 23: Q17Q (page 1372)

Question: . Classify the following items as (1) operating, (2) investing, (3) financing, or (4) significant noncash investing and financing activities, using the direct method.

(a) Cash payments to employees.

(b) Redemption of bonds payable.

(c) Sale of building at book value.

(d) Cash payments to suppliers.

(e) Exchange of equipment for furniture.

(f) Issuance of preferred stock.

(g) Cash received from customers.

(h) Purchase of treasury stock.

(i) Issuance of bonds for land.

(j) Payment of dividends.

(k) Purchase of equipment.

(l) Cash payments for operating expenses.

Short Answer

Expert verified

Answer

Transaction

Classification

(a) Cash payments to employees

(1) Operating

(b) Redemption of bonds payable

(3) Financing

(c) Sale of building at book value

(2) Investing

(d) Cash payments to suppliers

(1) Operating

(e) Exchange of equipment for furniture

(4) significant noncash investing and financing activities

(f) Issuance of preferred stock

(3) Financing

(g) Cash received from customers

(1) Operating

(h) Purchase of treasury stock

(3) Financing

(i) Issuance of bonds for land

(4) significant noncash investing and financing activities

(j) Payment of dividends

(3) Financing

(k) Purchase of equipment

(2) Investing

(l) Cash payments for operating expenses

(1) Operating

Step by step solution

01

Definition of Cash Flow Statement

The statement prepared by the business entity providing the information regarding all the transactions that increase or decrease the cash balance is known as the cash flow statement. Such a statement is prepared in three sections.

02

Classification of items

  1. Operating activity includes all the transactions that are related to daily business activities. For example, payments made to suppliers, receipt of cash from customers, and payment of any operating expense.
  2. Financing activities: All those activities that include the issue of securities either equity or debt are included in the financing activities.
  3. Investing activities: All those activities that involve the purchase and sale of the asset against cash are reported in the investing activities section.
  4. Significant non-cash investing and financing activities: Such activities do not involve cash but involve the issue of securities against the acquisition of asset.

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Most popular questions from this chapter

Question: ETHICS (Cash Flow Reporting)

Brockman Guitar Company is in the business of manufacturing top-quality, steelstring folk guitars. In recent years, the company has experienced working capital problems resulting from the procurement of factory equipment, the unanticipated buildup of receivables and inventories, and the payoff of a balloon mortgage on a new manufacturing facility. The founder and president of the company, Barbara Brockman, has attempted to raise cash from various financial institutions, but to no avail because of the company’s poor performance in recent years. In particular, the company’s lead bank, First Financial, is especially concerned about Brockman’s inability to maintain a positive cash position. The commercial loan officer from First Financial told Barbara, “I can’t even consider your request for capital financing unless I see that your company is able to generate positive cash flows from operations.” Thinking about the banker’s comment, Barbara came up with what she believes is a good plan: With a more attractive statement of cash flows, the bank might be willing to provide long-term financing. To “window dress” cash flows, the company can sell its accounts receivables to factors and liquidate its raw materials inventories. These rather costly transactions would generate lots of cash. As the chief accountant for Brockman Guitar, it is your job to tell Barbara what you think of her plan.

Instructions

Answer the following questions.

(a) What are the ethical issues related to Barbara Brockman’s idea?

(b) What would you tell Barbara Brockman?

In 2017, Wild Corporation reported a net loss of \(70,000. Wild’s only net income adjustments were depreciation expense \)81,000, and increase in accounts receivable $8,100. Compute Wild’s net cash provided (used) by operating activities.

Question:The comparative balance sheets for Hinckley Corporation show the following information.


December 31

2017

2016

Cash

\(33,500

\)13,000

Accounts receivable

12,250

10,000

Inventory

12,000

9,000

Available-for-sale debt investment

0

3,000

Building

0

29,750

Equipment

45,000

20,000

Patents

5,000

6,250

\(107,750

\)91,000

Allowance for doubtful accounts

\(3,000

\)4,500

Accumulated depreciation – equipment

2,000

4,500

Accumulated depreciation – building

0

6,000

Accounts payable

5,000

3,000

Dividend payable

0

5,000

Notes payable, short-term (non-trade)

3,000

4,000

Long-term note payable

31,000

25,000

Common stock

43,000

33,000

Retained earnings

20,750

6,000

\(107,750

\)91,000

Additional data related to 2017 are as follows.

1. Equipment that had cost \(11,000 and was 40% depreciated at time of disposal was sold for \)2,500.

2. \(10,000 of the long-term note payable was paid by issuing common stock.

3. Cash dividends paid were \)5,000.

4. On January 1, 2017, the building was completely destroyed by a flood. Insurance proceeds on the building were \(30,000 (net of \)2,000 taxes).

5. Investments (available-for-sale) were sold at \(1,700 above their cost. The company has made similar sales and investments in the past.

6. Cash was paid for the acquisition of equipment.

7. A long-term note for \)16,000 was issued for the acquisition of equipment.

8. Interest of \(2,000 and income taxes of \)6,500 were paid in cash.

Instructions

Prepare a statement of cash flows using the indirect method. Flood damage is unusual and infrequent in that part of the country

Question: GROUPWORK (Analysis of Transactions’ Effect on SCF) Each of the following items must be considered in preparing a statement of cash flows for Cruz Fashions Inc. for the year ended December 31, 2017.

  1. Fixed assets that had cost \(20,000 6½ years before and were being depreciated on a 10-year basis, with no estimated scrap value, were sold for \)4,750.
  2. During the year, goodwill of \(15,000 was considered impaired and was completely written off to expense.
  3. During the year, 500 shares of common stock with a stated value of \)25 a share were issued for \(32 a share.
  4. The company sustained a net loss for the year of \)2,100. Depreciation amounted to \(2,000 and patent amortization was \)400.
  5. Uncollectible accounts receivable in the amount of \(2,000 were written off against Allowance for Doubtful Accounts.
  6. Investments (available-for-sale) that cost \)12,000 when purchased 4 years earlier were sold for \(10,600.
  7. Bonds payable with a par value of \)24,000 on which there was an unamortized bond premium of $2,000 were redeemed at 101.

Instructions

For each item, state where it is to be shown in the statement and then how you would present the necessary information, including the amount. Consider each item to be independent of the others. Assume that correct entry were made for all transactions as they took place.

Springsteen Co. had the following activity in its most recent year of operations.

  1. Pension expense exceeds amount funded.
  2. Redemption of bonds payable
  3. Sale of the building at book value
  4. Depreciation
  5. Exchange of equipment for furniture
  6. Issuance of ordinary shares
  7. Amortization of intangible assets
  8. Purchase of treasury shares
  9. Issuance of bonds for land.
  10. Payment of dividends
  11. Increase in interest receivable on notes receivable
  12. Purchase of equipment.

Instructions Classify the items as (1) operating—add to net income, (2) operating—deduct from net income, (3) investing, (4) financing, or (5) significant non-cash investing and financing activities. Use the indirect method.
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