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

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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

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.

Classification of items

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.
Financing activities: All those activities that include the issue of securities either equity or debt are included in the financing activities.
Investing activities: All those activities that involve the purchase and sale of the asset against cash are reported in the investing activities section.
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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Debits	December 31
	2017	2016
Cash	\(35,000	\)32,000
Accounts receivables	33,000	30,000
Inventory	31,000	47,000
Property, plant and equipment	100,000	95,000
Unamortized bond discount	4,500	5,000
Cost of goods sold	250,000	380,000
Selling expenses	141,500	172,000
General and administration expenses	137,000	151,300
Interest expenses	4,300	2,600
Income tax expenses	20,400	61,200
	\(756,700	\)976,100

Credits	December 31
	2017	2016
Allowance for doubtful accounts	\(1,300	\)1,100
Accumulated depreciation – Plant assets	16,500	15,000
Account payable	25,000	15,500
Income tax payable	21,000	29,100
Deferred tax liability	5,300	4,600
8% callable bonds payable	45,000	20,000
Common stock	50,000	40,000
Paid-in-capital in excess of par	9,100	7,500
Retained earnings	44,700	64,600
Sales revenue	538,800	778,700
	\(756,700	\)976,100

(a) Cash collected from customer	(d) Cash paid for income tax
(b) Cash paid to suppliers	(e) Cash paid for selling expenses
(c) Cash paid for interest

MICHAELS COMPANY COMPARATIVE BALANCE SHEETS AS OF DECEMBER 31, 2017 AND 2016
	2017	2016
Cash	\(10,000	\)4,000
Accounts receivable	20,500	12,950
Short-term investments	22,000	30,000
Inventory	42,000	35,000
Prepaid rent	3,000	12,000
Prepaid insurance	2,100	900
Supplies	1,000	750
Land	125,000	175,000
Building	350,000	350,000
Accumulated depreciation – building	(105,000)	(87,500)
Equipment	525,000	400,000
Accumulated depreciation – equipment	(130,000)	(112,000)
Patents	45,000	50,000
Total assets	\(910,600	\)871,100

Account payable	\(22,000	\)32,000
Income tax payable	5,000	4,000
Salaries and wages payable	5,000	3,000
Short-term note payable	10,000	10,000
Long-term note payable	60,000	70,000
Bond payable	400,000	400,000
Premium on bond payable	20,303	25,853
Common stock	240,000	220,000
Paid-in-capital in excess of par – common stock	25,000	17,500
Retained earnings	123,297	88,747
Total liabilities and stockholders equity	\(910,600	\)871,100

MICHAELS COMPANY INCOME STATEMENT AND DIVIDEND INFORMATION FOR THE YEAR ENDED DECEMBER 31, 2017
Sales revenue		\(1,160,000
Cost of goods sold		748,000
Gross margin		412,000
Operating expenses
Selling expenses	\)79,200
Administrative expenses	156,700
Depreciation/Amortization expenses	40,500
Total operating expenses		276,400
Income from operations		135,600
Other revenue/expenses
Gain on sale of land	8,000
Gain on sale of short-term investment	4,000
Dividend revenue	2,400
Interest expenses	(51,750)	(37,350)
Income before tax		98,250
Income tax expenses		39,400
Net income		58,850
Dividend to common stockholders		(24,300)
To Retained earnings		$34,550

Short Answer

Step by step solution

Definition of Cash Flow Statement

Classification of items

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