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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

Chapman Company, a major retailer of bicycles and accessories, operates several stores and is a publicly traded company. The comparative balance sheet and income statement for Chapman as of May 31, 2017, are as follows. The company is preparing its statement of cash flows.

CHAPMAN COMPANY

COMPARATIVE BALANCE SHEET

AS OF MAY 31

2017 2016

Current assets Cash \( 28,250 \) 20,000

Accounts receivable 75,000 58,000

Inventory 220,000 250,000

Prepaid expenses 9,000 7,000

Total current assets 332,250 335,000

Plant assets

Plant assets 600,000 502,000

Less: Accumulated depreciation—plant assets 150,000 125,000

Net plant assets 450,000 377,000

Total assets \(782,250 \)712,000

Current liabilities

Accounts payable \(123,000 \)115,000

Salaries and wages payable 47,250 72,000

Interest payable 27,000 25,000

Total current liabilities 197,250 212,000

Long-term debt

Bonds payable 70,000 100,000

Total liabilities 267,250 312,000

Stockholders’ equity

Common stock, \(10 par 370,000 280,000

Retained earnings 145,000 120,000

Total stockholders’ equity 515,000 400,000

Total liabilities and stockholders’ equity \)782,250 \(712,000

CHAPMAN COMPANY

INCOME STATEMENT

FOR THE YEAR ENDED MAY 31, 2017

Sales revenue \)1,255,250

Cost of goods sold 722,000

Gross profit 533,250

Expenses Salaries and wages expense 252,100

Interest expense 75,000

Depreciation expense 25,000

Other expenses 8,150

Total expenses 360,250

Operating income 173,000

Income tax expense 43,000

Net income \( 130,000

The following is additional information concerning Chapman’s transactions during the year ended May 31, 2017.

1. All sales during the year were made on account.

2. All merchandise was purchased on account, comprising the total accounts payable account.

3. Plant assets costing \)98,000 were purchased by paying \(28,000 in cash and issuing 7,000 shares of stock.

4. The “other expenses” are related to prepaid items.

5. All income taxes incurred during the year were paid during the year.

6. In order to supplement its cash, Chapman issued 2,000 shares of common stock at par value.

7. Cash dividends of \)105,000 were declared and paid at the end of the fiscal year.

Instructions

(a) Compare and contrast the direct method and the indirect method for reporting cash flows from operating activities.

(b) Prepare a statement of cash flows for Chapman Company for the year ended May 31, 2017, using the direct method. Be sure to support the statement with appropriate calculations. (A reconciliation of net income to net cash provided is not required.)

(c) Using the indirect method, calculate only the net cash flow from operating activities for Chapman Company for the year ended May 31, 2017.

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.

Question: (Analysis of Improper SCF) The following statement was prepared by Maloney Corporation’s accountant.


MALONEY CORPORATION

STATEMENT OF SOURCES AND APPLICATION OF CASH

FOR THE YEAR ENDED SEPTEMBER 30, 2017

Sources of cash

Net income

\(111,000

Depreciation and depletion

70,000

Increase in long-term debt

179,000

Changes in current receivables and inventories, less current liabilities (excluding current maturities of long-term debt)

14,000

\)374,000

Application of cash

Cash dividend

\(60,000

Expenditure for property, plant, and equipment

214,000

Investments and other uses

20,000

Change in cash

80,000

\)374,000

The following additional information relating to Maloney Corporation is available for the year ended September 30, 2017.

  1. Salaries and wages expense attributable to stock option plans was \(25,000 for the year.
  2. Net expenditure:

Expenditures for property, plant, and equipment

\)250,000

Proceeds from retirements of property, plant, and equipment

36,000

Net expenditures

\(214,000

  1. A stock dividend of 10,000 shares of Maloney Corporation common stock was distributed to common stockholders on April 1, 2017, when the per share market price was \)7 and par value was \(1.
  2. On July 1, 2017, when its market price was \)6 per share, 16,000 shares of Maloney Corporation common stock were issued in exchange for 4,000 shares of preferred stock.
  3. Depreciation expenses:

Depreciation expenses

\(65,000

Depletion expenses

5,000

\)70,000

  1. Net increase:

Increase in long-term debt

\(620,000

Less: Redemption of debt

441,000

Net increases

\)179,000

Instructions

(a) In general, what are the objectives of a statement of the type shown above for Maloney Corporation? Explain.

(b) Identify the weaknesses in the form and format of Maloney Corporation’s statement of cash flows without reference to the additional information. (Assume adoption of the indirect method.)

(c) For each of the six items of additional information for the statement of cash flows, indicate the preferable treatment and explain why the suggested treatment is preferable.

Krauss Company’s income statement for the year ended December 31, 2017, contained the following condensed information.

Service revenue \(840,000

Operating expenses (excluding depreciation) \)624,000

Depreciation expense 60,000

Loss on sale of equipment 26,000 710,000

Income before income taxes 130,000

Income tax expense 40,000

Net income \( 90,000

Krauss’s balance sheet contained the following comparative data at December 31.

2017 2016

Accounts receivable \)37,000 $54,000

Accounts payable 41,000 31,000

Income taxes payable 4,000 8,500

(Accounts payable pertains to operating expenses.)

Instructions Prepare the operating activities section of the statement of cash flows using the direct method.

Question: Your roommate is puzzled. During the last year, the company in which she is a stockholder reported a net loss of \(675,000, yet its cash increased \)321,000 during the same period of time. Explain to your roommate how this situation could occur.
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