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Question: CA23-5 (Purpose and Elements of SCF) GAAP requires the statement of cash flows be presented when financial statements are prepared.

Instructions

(a) Explain the purposes of the statement of cash flows.

(b) List and describe the three categories of activities that must be reported in the statement of cash flows.

(c) Identify and describe the two methods that are allowed for reporting cash flows from operations.

(d) Describe the financial statement presentation of noncash investing and financing transactions. Include in your description an example of a noncash investing and financing transaction.

Short Answer

Expert verified

Answer

  1. Cash flow statement is prepared to provideinformation to the investors and the creditors.
  2. Cash flow statement has three sections: investing,operating, andfinancing.
  3. There aretwo methods to prepare a cash flow statement: direct and indirect.
  4. Non-cash investing and financing transactions are reported by preparing a separate schedule at the bottom of the cash flow statement.

Step by step solution

01

Definition of Statement of Cash Flow

The schedule prepared by the business entity for providing a summary of all the transactions, including cash payments and receipts, is known as the statement of cash flow.

02

Purpose of the statement of cash flows

The cash flow statement is prepared for:

  1. Determining the ability of the business entity to generate cash.
  2. Determining the potential of the business entity to pay dividends and meet other cash obligations.
  3. To determine the reason behind the difference between the cash flow from operating and net income.
  4. To identify the cash and non-cash transactions related to investing and financing transactions.
03

Categories of activities reported in the statement of cash flows

Operating activities: This section of the cash flow statement reports the cash effect of all the transactions that are reported for the calculation of the net income of the business entity.

Investing activities: This section reports the transactions related to the long-term assets of the business entity affecting the cash position.

Financing activities: This section reports the transaction relating to the equity and liability affecting the cash position of the business entity.

04

Methods for reporting cash flow

Direct Method: Under the direct method, the business entity calculates the net cash flow from operation by taking the difference between the operating cash receipts and operating cash disbursement.

Indirect Method: Under the indirect method, the business entity calculates the net cash flow from operating activities by adjusting the net income with the transactions that will affect net income without affecting the cash position. After adjusting net income, the business entity adds and deducts the investing and financing transactions affecting the cash position. After this, the investing and financing transaction affecting the cash position is reported.

05

Presentation of non-cash investing and financing transaction

The business entity's non-cash investing and financing activities are reported in a separate schedule prepared at the bottom of the cash flow statement.

Example of transactions:

  1. Investing transaction: Acquisition of any fixed asset by issuing securities.
  2. Financing transaction: Conversion of debt securities into equity.

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Most popular questions from this chapter

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 Depreciationโ€” 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.

Data for Krauss Company are presented in E23-5.

Instructions

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

Following are selected statement of financial position accounts of Sander Bros. Corp. at December 31, 2017 and 2016, and the increases or decreases in each account from 2016 to 2017. Also presented is selected income statement information for the year ended December 31, 2017, and additional information.

Selected statement of financial position accounts

2017

2016

Increase

(Decrease)

Assets

Property, plant, and equipment

\(277,000

\)247,000

\(30,000

Accumulated depreciation

(178,000)

(167,000)

(11,000)

Accounts receivable

34,000

24,000

10,000

Equity and liabilities

Share capitalโ€”ordinary, \)1 par

\( 22,000

\) 19,000

\( 3,000

Share premiumโ€”ordinary

9,000

3,000

6,000

Retained earnings

104,000

91,000

13,000

Bonds payable

49,000

46,000

3,000

Dividends payable

8,000

5,000

3,000

Selected income statement information for the year ended December 31, 2017

Sales revenue

\)155,000

Depreciation

38,000

Gain on sale of equipment

14,500

Net income

31,000

Additional information:

  1. During 2017, equipment costing \(45,000 was sold for cash.
  2. Accounts receivable relate to sales of merchandise.
  3. During 2017, \)25,000 of bonds payable were issued in exchange for property, plant, and equipment.

There was no amortization of bond discount or premium.

Instructions Determine the category (operating, investing, or financing) and the amount that should be reported in the statement of cash flows for the following items.

  1. Payments for purchase of property, plant, and equipment.
  2. Proceeds from the sale of equipment.
  3. Cash dividends paid.
  4. Redemption of bonds payable.

Springsteen Co. had the following activity in its most recent year of operations.

  1. Pension expense exceeds amount funded.
  2. Redemption of bonds payable
  3. Sale of the building at book value
  4. Depreciation
  5. Exchange of equipment for furniture
  6. Issuance of ordinary shares
  7. Amortization of intangible assets
  8. Purchase of treasury shares
  9. Issuance of bonds for land.
  10. Payment of dividends
  11. Increase in interest receivable on notes receivable
  12. Purchase of equipment.

Instructions Classify the items as (1) operatingโ€”add to net income, (2) operatingโ€”deduct from net income, (3) investing, (4) financing, or (5) significant non-cash investing and financing activities. Use the indirect method.

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.

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