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Novak Corporation is preparing its 2017 statement of cash flows, using the indirect method. Presented below is a list of items that may affect the statement. Using the code below, indicate how each item will affect Novak’s 2017 statement of cash flows.

Code Letter Effect

A Added to net income in the operating section

D Deducted from net income in the operating section

R-I Cash receipt in investing section

P-I Cash payment in investing section

R-F Cash receipt in financing section

P-F Cash payment in financing section

N Noncash investing and financing activity

(a)Purchase of land and building

(b)Decrease in accounts receivable

(c)Issuance of stock.

(d)Depreciation expense.

(e)Sale of land at book value.

(f)Sale of land at a gain.

(g)Payment of dividends.

(h)Increase in accounts receivable.

(i)Purchase of available-for-sale debt investment

(j)Increase in accounts payable.

(k)Decrease in accounts payable.

(l)Loan from bank by signing note

(m)Purchase of equipment using a note

(n)Increase in inventory

(o)Issuance of bonds.

(p)Redemption of bonds payable.

(q)Sale of equipment at a loss.

(r)Purchase of treasury stock.

Short Answer

Expert verified

A cash flow statement separates the transactions according to their nature, such that if a transaction is related to the main production, then it is under operation, and if the transaction is related to finance, then it is under financing activity.

Step by step solution

01

Meaning of Cash Flow Statement

It is one of the reporting methods of cash transactions in a separate statement that records only business transactions where the monetary term is included. It helps to determine the flow of cash in the business.

02

Indication of the below transactions

Items

Code

Effect

Purchase of land and building

P-I

Cash payment in investing section.

Decrease in accounts receivable

A

Added to net income in the operating section.

Issuance of stock.

R-F

Cash receipt in financing section.

Depreciation expense

A

Added to net income in the operating section.

Sale of land at book value

R-I

Cash receipt in investing section.

Sale of land at a gain.

R-I

D

Cash receipt in investing section.

Deducted from net income in the operating section

Payment of dividends.

P-F

Cash payment in financing section.

Increase in accounts receivable.

D

Deducted from net income in the operating section.

Purchase of available-for-sale debt investment

P-I

Cash payment in investing section.

Increase in accounts payable.

A

Added to net income in the operating section.

Decrease in accounts payable

D

Deducted from net income in the operating section.

Loan from bank by signing note

R-F

Cash receipt in financing section.

Purchase of equipment using a note

N

Non-cash investing and financing activity.

Increase in inventory

D

Deducted from net income in the operating section.

Issuance of bonds.

R-F

Cash receipt in financing section.

Redemption of bonds payable.

P-F

Cash payment in financing section.

Sale of equipment at a loss.

R-I

A

Cash receipt in investing section.

Added to net income in the operating section.

Purchase of treasury stock.

P-F

Cash payment in financing section.

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Most popular questions from this chapter

Question: The board of directors of Tirico Corp. declared cash dividends of \(260,000 during the current year. If dividends payable was \)85,000 at the beginning of the year and $90,000 at the end of the year, how much cash was paid in dividends during the year?

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

What are some of the key obstacles for the FASB and IASB within their accounting guidance in the area of cash flow reporting? Explain.

Question: Michaels Company had available at the end of 2017 the following information.

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

Instructions

Prepare a statement of cash flows for Michaels Company using the direct method accompanied by a reconciliation schedule. Assume the short-term investments are debt securities, classified as available-for-sale

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.

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