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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

Question:Mortonson Company has not yet prepared a formal statement of cash flows for the 2017 fiscal year. Comparative balance sheets as of December 31, 2016 and 2017, and a statement of income and retained earnings for the year ended December 31, 2017, are presented as follows.


MORTONSON COMPANY

STATEMENT OF INCOME AND RETAINED EARNINGS

FOR THE YEAR ENDED DECEMBER 31, 2017

(\(000 OMITTED)

Sales revenue

\)3,800

Expenses

Cost of goods sold

\(1,200

Salaries and benefits

725

Heat, light and power

75

Depreciation

80

Property tax

19

Patent amortization

25

Miscellaneous expenses

10

Interest

30

2,164

Income before taxes

1,636

Income tax

818

Net income

818

Retained earnings – Jan 1, 2017

310

1,128

Stock dividend declared and issued

600

Retained earnings Dec 31, 2017

\)528


MORTONSON COMPANY

COMPARATIVE BALANCE SHEETS

AS OF DECEMBER 31

(\(000 OMITTED)

Assets

2017

2016

Current assets

Cash

\)333

\(100

U.S treasury notes (available for sale)

10

50

Accounts receivables

780

500

Inventory

720

560

Total current assets

1,843

1,210

Long-term assets

Land

150

70

Building and equipment

910

600

Accumulated depreciation – building and equipment

(200)

(120)

Patent (less: amortization)

105

130

Total long-term assets

965

680

Total assets

\)2,808

\(1,890

Liabilities and stockholder’s equity

Current liabilities

Account payable

\)420

\(330

Income tax payable

40

30

Notes payable

320

320

Total current liabilities

780

680

Long-term note payable

200

200

Total liabilities

980

880

Stockholder’s equity

Common stock

1,300

700

Retained earnings

528

310

Total stockholder’s equity

1,828

1,010

Total liabilities and stockholder’s equity

\)2,808

$1,890

Instructions

Prepare a statement of cash flows using the direct method. Changes in accounts receivable and accounts payable relate to sales and the cost of goods sold. Do not prepare a reconciliation schedule.

The accounts below appear in the ledger of Anita Baker Company.

Retained Earnings Dr. Cr. Bal.

Jan. 1, 2017 Credit Balance \( 42,000

Aug. 15 Dividends (cash) \)15,000 27,000

Dec. 31 Net Income for 2017 \(40,000 67,000

Equipment Dr. Cr. Bal.

Jan. 1, 2017 Debit Balance \)140,000

Aug. 3 Purchase of Equipment \(62,000 202,000

Sept. 10 Cost of Equipment Constructed 48,000 250,000

Nov. 15 Equipment Sold \)56,000 194,000

Accumulated Depreciation— Equipment Dr. Cr. Bal.

Jan. 1, 2017 Credit Balance \( 84,000

Apr. 8 Major Repairs \)21,000 63,000

Nov. 15 Accum. Depreciation on Equipment Sold 25,200 37,800

Dec. 31 Depreciation for 2017 \(16,800 54,600

Instructions

From the postings in the accounts above, indicate how the information is reported on a statement of cash flows by preparing a partial statement of cash flows using the indirect method. The loss on sale of equipment (November 15) was \)5,800.

For purposes of the statement of cash flows, under IFRS interest paid is treated as:

  1. an operating activity in all cases.
  2. an investing or operating activity, depending on use of the borrowed funds.
  3. either a financing or investing activity.
  4. either an operating or financing activity, but treated consistently from period to period.

Differentiate between the direct method and the indirect method by discussing each method

Question:Data for the Vince Gill Company are presented in E23-3.

Instructions

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

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