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Differentiate between investing activities, financing activities, and operating activities.

Short Answer

Expert verified

Cash-related net pay operations are included in operating exercises. Cash-related noncurrent resource operations are considered investments. Cash transactions are financing activities, including owners' value and noncurrent liabilities.

Step by step solution

01

Meaning of Financing Activities

A trade’s net financing over a particular period is considered financing activities. The issuing and reimbursement of values, the payment of profits, the issuance and reimbursement of obligations, and capital rent obligations are all examples of financial activity.

02

Difference between investing, financing, and operating activities.

Lending cash, collecting on such credits, and obtaining and arranging investments and useful long-lived assets are two investing operations that regularly incorporate non-current resources.

On the other hand, financing activities include obligation and value components and include getting cash from creditors and paying back the money borrowed as well as getting capital from proprietors and giving them a return on their investment.

All acts and events are not contributing, or financing exercises are operating exercises. The cash results of exchanges utilized to calculate net income are a part of operating operations.

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Most popular questions from this chapter

Stan Conner and Mark Stein were discussing the statement of cash flows of Bombeck Co. In the notes to the statement of cash flows was a schedule entitled “Non-cash investing and financing activities.” Give three examples of significant non-cash transactions that would be reported in this schedule.

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.

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:(SCF—Indirect Method) The following are Sullivan Corp.’s comparative balance sheet accounts at December 31, 2017 and 2016, with a column showing the increase (decrease) from 2016 to 2017.

Comparative Balance Sheet

2017

2016

Increase (Decrease)

Cash

\(815,000

\)700,000

\(115,000

Accounts receivable

1,128,000

1,168,000

(40,000)

Inventory

1,850,000

1,715,000

135,000

Property, plant and equipment

3,307,000

2,967,000

340,000

Accumulated depreciation

(1,165,000)

(1,040,000)

(125,000)

Investment in Myers Co

310,000

275,000

35,000

Loan receivable

250,000

-

250,000

Total assets

\)6,495,000

\(5,785,000

\)710,000

Account payable

\(1,015,000

\)955,000

\(60,000

Income taxes payable

30,000

50,000

(20,000)

Dividend payable

800,000

100,000

(20,000)

Lease liability

400,000

-

400,000

Common stock, \) 1 par value

500,000

500,000

0

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

1,500,000

1,500,000

0

Retained earnings

2,970,000

2,680,000

290,000

Total liabilities and stockholders equity

\(6,495,000

\)5,785,000

\(710,000

Additional information:

1. On December 31, 2016, Sullivan acquired 25% of Myers Co.’s common stock for \)275,000. On that date, the carrying value of Myers’s assets and liabilities, which approximated their fair values, was \(1,100,000. Myers reported income of \)140,000 for the year ended December 31, 2017. No dividend was paid on Myers’s common stock during the year.

2. During 2017, Sullivan loaned \(300,000 to TLC Co., an unrelated company. TLC made the first semi-annual principal repayment of \)50,000, plus interest at 10%, on December 31, 2017.

3. On January 2, 2017, Sullivan sold equipment costing \(60,000, with a carrying amount of \)38,000, for \(40,000 cash.

4. On December 31, 2017, Sullivan entered into a capital lease for an office building. The present value of the annual rental payments is \)400,000, which equals the fair value of the building. Sullivan made the first rental payment of \(60,000 when due on January 2, 2018.

5. Net income for 2017 was \)370,000.

6. Sullivan declared and paid the following cash dividends for 2017 and 2016.

2017

2016

Declared

December 15, 2017

December 15, 2016

Paid

February 28, 2018

February 28, 2018

Amount

\(80,000

\)100,000

Instructions

Prepare a statement of cash flows for Sullivan Corp. for the year ended December 31, 2017, using the indirect method.

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.

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