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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:Comparative balance sheet accounts of Marcus Inc. are presented below.

MARCUS INC.

COMPARATIVE BALANCE SHEET ACCOUNTS

AS OF DECEMBER 31, 2017 AND 2016

December 31

2017 2016

Debit Accounts

Cash \( 42,000 \) 33,750

Accounts Receivable 70,500 60,000

Inventory 30,000 24,000

Equity investments 22,250 38,500

Machinery 30,000 18,750

Buildings 67,500 56,250

Land 7,500 7,500

\(269,750 \)238,750

Credit Accounts

Allowance for Doubtful Accounts \( 2,250 \) 1,500

Accumulated Depreciation—Machinery 5,625 2,250

Accumulated Depreciation—Buildings 13,500 9,000

Accounts Payable 35,000 24,750

Accrued Payables 3,375 2,625

Long-Term Notes Payable 21,000 31,000

Common Stock, no-par 150,000 125,000

Retained Earnings 39,000 42,625

\(269,750 \)238,750

Additional data (ignoring taxes):

1. Net income for the year was \(42,500.

2. Cash dividends declared and paid during the year were \)21,125.

3. A 20% stock dividend was declared during the year. \(25,000 of retained earnings was capitalized.

4. Equity investments (level of ownership is less than 20%) that cost \)25,000 were sold during the year for \(28,750. No unrealized gains and losses were recorded on these investments in 2017.

5. Machinery that cost \)3,750, on which \(750 of depreciation had accumulated, was sold for \)2,200. Marcus’s 2017 income statement follows (ignoring taxes).

Sales revenue \(540,000

Less: Cost of goods sold 380,000

Gross margin 160,000

Less: Operating expenses (includes \)8,625 depreciation and \(5,400 bad debts) 120,450

Income from operations 39,550

Other: Gain on sale of investments \)3,750

Loss on sale of machinery (800) 2,950

Net income $ 42,500

Instructions

  1. Compute net cash flow from operating activities using the direct method.

(b) Prepare a statement of cash flows using the indirect method.

Comparative balance sheet accounts of Sharpe Company are presented below.

SHARPE COMPANY

COMPARATIVE BALANCE SHEET ACCOUNTS

AS OF DECEMBER 31

Debit Balances 2017 2016

Cash \( 70,000 \) 51,000

Accounts Receivable 155,000 130,000

Inventory 75,000 61,000

Debt investments (available-for-sale) 55,000 85,000

Equipment 70,000 48,000

Buildings 145,000 145,000

Land 40,000 25,000

Totals \(610,000 \)545,000

Credit Balances

Allowance for Doubtful Accounts \( 10,000 \) 8,000

Accumulated Depreciation—Equipment 21,000 14,000

Accumulated Depreciation—Buildings 37,000 28,000

Accounts Payable 66,000 60,000

Income Taxes Payable 12,000 10,000

Long-Term Notes Payable 62,000 70,000

Common Stock 310,000 260,000

Retained Earnings 92,000 95,000

Totals \(610,000 \)545,000

Additional data:

1. Equipment that cost \(10,000 and was 60% depreciated was sold in 2017.

2. Cash dividends were declared and paid during the year.

3. Common stock was issued in exchange for land.

4. Debt investments that cost \)35,000 were sold during the year.

5. There were no write-offs of uncollectible accounts during the year.

Sharpe’s 2017 income statement is as follows.

Sales revenue \(950,000

Less: Cost of goods sold 600,000

Gross profit 350,000

Less: Operating expenses (includes depreciation expense and bad debt expense) 250,000

Income from operations 100,000

Other revenues and expenses Gain on sale of investments \)15,000

Loss on sale of equipment (3,000) 12,000

Income before taxes 112,000

Income taxes 45,000

Net income $ 67,000

Instructions

(a) Compute net cash provided by operating activities under the direct method.

(b) Prepare a statement of cash flows using the indirect method.

The following data are taken from the records of Alee Company

December 31, December 31,

2017 2016

Cash \( 15,000 \) 8,000

Current assets other than cash 85,000 60,000

Long-term debt investments 10,000 53,000

Plant assets 335,000 215,000

\(445,000 \)336,000

December 31, December 31,

2017 2016

Accumulated depreciation \( 20,000 \) 40,000

Current liabilities 40,000 22,000

Bonds payable 75,000 –0–

Common stock 254,000 254,000

Retained earnings 56,000 20,000

\(445,000 \)336,000

Additional information:

1. Held-to-maturity securities carried at a cost of \(43,000 on December 31, 2016, were sold in 2017 for \)34,000. The loss (not unusual) was incorrectly charged directly to Retained Earnings.

2. Plant assets that cost \(50,000 and were 80% depreciated were sold during 2017 for \)8,000. The loss was incorrectly charged directly to Retained Earnings.

3. Net income as reported on the income statement for the year was \(57,000.

4. Dividends paid amounted to \)10,000.

5. Depreciation charged for the year was $20,000.

Instructions

Prepare a statement of cash flows for the year 2017 using the indirect method

Question: You have completed the field work in connection with your audit of Alexander Corporation for the year ended December 31, 2017. The balance sheet accounts at the beginning and end of the year are shown below.

Dec 31, 2017

Dec 31, 2016

Increase or (decrease)

Cash

\(277,900

\)298,000

(\(20,100)

Accounts receivable

469,424

353,000

116,424

Inventory

741,700

610,000

131,700

Prepaid expenses

12,000

8,000

4,000

Investment in subsidiary

110,500

0

110,500

Cash surrender value of life insurance

2,304

1,800

504

Machinery

207,000

190,000

17,000

Buildings

535,200

407,900

127,300

Land

52,500

52,500

0

Patents

69,000

64,000

5,000

Copyrights

40,000

50,000

(10,000)

Bond discount and issue costs

4,502

0

4,502

Total

\)2,522,030

\(2,035,200

\)486,830

Income tax payable

\(90,250

\)79,600

\(10,650

Account payable

299,280

280,000

19,280

Dividend payable

70,000

0

70,000

Bond payable – 8%

125,000

0

125,000

Bond payable – 12%

0

100,000

(100,000)

Allowance for doubtful accounts

35,300

40,000

(4,700)

Accumulated depreciation – building

424,000

400,000

24,000

Accumulated depreciation – machinery

173,000

130,000

43,000

Premium on bond payable

0

2,400

(2,400)

Common stock – no par

1,176,200

1,453,200

(277,000)

Paid-in-capital in excess of par – common stock

109,000

0

109,000

Retained earnings – unappropriated

20,000

(450,000)

470,000

Total

\)2,522,030

\(2,035,200

\)486,830

STATEMENT OF RETAINED EARNINGS

FOR THE YEAR ENDED DECEMBER 31, 2017


January 1, 2017

Balance (deficit)

(\(450,000)

March 31, 2017

Net income for first quarter of 2017

25,000

April 1, 2017

Transfer from paid-in capital

425,000

Balance

0

December 31, 2017

Net income for last three quarters of 2017

90,000

Dividend declared—payable January 21, 2018

(70,000)

Balance

\)20,000

Your working papers from the audit contain the following information:

1. On April 1, 2017, the existing deficit was written off against paid-in capital created by reducing the stated value of the nopar stock.

2. On November 1, 2017, 29,600 shares of no-par stock were sold for \(257,000. The board of directors voted to regard \)5 per share as stated capital.

3. A patent was purchased for \(15,000.

4. During the year, machinery that had a cost basis of \)16,400 and on which there was accumulated depreciation of \(5,200 was sold for \)9,000. No other plant assets were sold during the year.

5. The 12%, 20-year bonds were dated and issued on January 2, 2005. Interest was payable on June 30 and December 31. They were sold originally at 106. These bonds were redeemed at 100.9 plus accrued interest on March 31, 2017.

6. The 8%, 40-year bonds were dated January 1, 2017, and were sold on March 31 at 97 plus accrued interest. Interest is payable semiannually on June 30 and December 31. Expense of issuance was \(839.

7. Alexander Corporation acquired 70% control in Crimson Company on January 2, 2017, for \)100,000. The income statement of Crimson Company for 2017 shows a net income of \(15,000.

8. Major repairs to buildings of \)7,200 were charged to Accumulated Depreciation—Buildings. 9. Interest paid in 2017 was \(10,500 and income taxes paid were \)34,000.

Instructions

From the information given, prepare a statement of cash flows using the indirect method. A worksheet is not necessary, but the principal computations should be supported by schedules or general ledger accounts. The company uses straight-line amortization for bond interest.

Question: Which of the following is true regarding the statement of cash flows under IFRS?

  1. The statement of cash flows has two major sections— operating and non-operating.
  2. The statement of cash flows has two major sections— financing and investing.
  3. The statement of cash flows has three major sections— operating, investing, and financing.
  4. The statement of cash flows has three major sections— operating, non-operating, and financing
See all solutions

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