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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

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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: The net income for Fallon Company for 2017 was \(320,000. During 2017, depreciation on plant assets was \)124,000, amortization of patent was \(40,000, and the company incurred a loss on sale of plant assets of \)21,000. Compute net cash flow from operating activities.

Identify the following items as (1) operating, (2) investing, or (3) financing activities: purchase of land, payment of dividends, cash sales, and purchase of treasury stock.

Dingel Corporation has contracted with you to prepare a statement of cash flows. The controller has provided the following information.

December 31

2017

2016

Buildings

\( โ€“0โ€“

\)29,750

Equipment

45,000

20,000

Patents

5,000

6,250

Investments

โ€“0โ€“

3,000

Inventory

12,000

9,000

Accounts receivable

12,250

10,000

Cash

33,500

13,000

\(107,750

\)91,000

Share capitalโ€”ordinary

\( 43,000

\)33,000

Retained earnings

20,750

6,000

Allowance for doubtful accounts

3,000

4,500

Accumulated depreciation on equipment

2,000

4,500

Accumulated depreciation on buildings

โ€“0โ€“

6,000

Accounts payable

5,000

3,000

Dividends payable

โ€“0โ€“

5,000

Long-term notes payable

31,000

25,000

Notes payable, short-term (non-trade)

3,000

4,000

\(107,750

\)91,000

Additional data related to 2017 are as follows.

  1. Equipment that had cost \(11,000 and was 40% depreciated at the time of disposal was sold for \)2,500.
  2. \(10,000 of the long-term notes payable was paid by issuing ordinary shares.
  3. Cash dividends paid were \)5,000.
  4. On January 1, 2017, the building was completely destroyed by a flood. Insurance proceeds on the building were \(32,000.
  5. Equity investments (non-trading) were sold at \)1,700 above their cost.
  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.

Founded in the early 1980s, the Vermont Teddy Bear Co. designs and manufactures American-made teddy bears and markets them primarily as gifts called Bear-Grams or Teddy Bear-Grams. Bear-Grams are personalized teddy bears delivered directly to the recipient for special occasions such as birthdays and anniversaries. The Shelburne, Vermont, companyโ€™s primary markets are New York, Boston, and Chicago. Sales have jumped dramatically in recent years. Such dramatic growth has significant implications for cash flows. Provided below are the cash flow statements for two recent years for the company.

Current Year

Prior Year

Cash flows from operating activities:

Net income

\( 17,523

\) 838,955

Adjustments to reconcile net income to net cash provided by operating activities

Deferred income taxes

(69,524)

(146,590)

Depreciation and amortization

316,416

181,348

Changes in assets and liabilities:

Accounts receivable, trade

(38,267)

(25,947)

Inventories

(1,599,014)

(1,289,293)

Prepaid and other current assets

(444,794)

(113,205)

Deposits and other assets

(24,240)

(83,044)

Accounts payable

2,017,059

(284,567)

Accrued expenses

61,321

170,755

Accrued interest payable, debentures

-

(58,219)

Other

-

(8,960)

Income taxes payable

-

117,810

Net cash provided by (used for) operating activities

236,480

(700,957)

Net cash used for investing activities

(2,102,892)

(4,422,953)

Net cash (used for) provided by financing activities

(315,353)

9,685,435

Net change in cash and cash equivalents

(2,181,765)

4,561,525

Other information:

Current liabilities

\( 4,055,465

\) 1,995,600

Total liabilities

4,620,085

2,184,386

Net sales

20,560,566

17,025,856

Instructions

  1. Note that net income in the current year was only \(17,523 compared to prior-year income of \)838,955, but net cash flow from operating activities was \(236,480 in the current year and a negative \)700,957 in the prior year. Explain the causes of this apparent paradox.
  2. Evaluate Vermont Teddy Bearโ€™s liquidity, solvency, and profitability for the current year using cash flow-based ratios.

Broussard Company reported net income of \(3.5 million in 2017. Depreciation for the year was \)520,000, accounts receivable increased \(500,000, and accounts payable increased \)300,000. Compute net cash flow from operating activities using the indirect method.

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