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Chapter 14: 14-2SE (page 769)

Question: Classifying items on the statement of cash flows Cash flow items

must be categorized into one of four categories. Identify each item as operating (O), investing (I), financing (F), or non-cash (N).

a. Cash purchase of merchandise inventory

b. Cash payment of dividends

c. Cash receipt from the collection of long-term notes receivable

d. Cash payment for income taxes

e. Purchase of equipment in exchange for notes payable

f. Cash receipt from the sale of land

g. Cash received from borrowing money

h. Cash receipt for interest income

i. Cash receipt from the issuance of common stock

j. Cash payment of salaries

Short Answer

Expert verified

Answer

  1. Operating (O)
  2. Financing (F)
  3. Investing (I)
  4. Operating (O)
  5. Non-cash (N)
  6. Investing (I)
  7. Financing (F)
  8. Operating (O)
  9. Financing (F)
  10. Operating (O)

Step by step solution

01

Explanation for operating activities

Transaction

Activity

Explanation

a.Cash purchase of merchandise inventory

Operating

Purchase of inventory in the course of business is an operating activity.

d.Cash payment for income taxes

Operating

Income tax is payable on the net income of the organization. Net income is a result of operating activities hence, payment of income tax is also an operating activity.

h.Cash receipt for interest income

Operating

There is no separate account for interest income therefore, it is credited in the statement of profit and loss and become part of operating activity.

j.Cash payment of salaries

Operating

There is no separate account for salaries and wages therefore, it is credited in the statement of profit and loss and become part of operating activity. Also, payment to employees is a day-to-day activity so it is an operating activity.

02

Explanation for investing activities

Transaction

Activity

Explanation

c.Cash receipt from the collection of long-term notes receivable

Investing

Long-term notes receivable is a long-term asset hence Cash receipt from the collection of long-term notes receivable is an investing activity.

f.Cash receipt from the sale of land

Investing

Purchase of land is an investment. So, when the land is sold cash receipt from such sale is an investing activity.

03

Explanation for investing activities

Transaction

Activity

Explanation

b.Cash payment of dividends

Financing

Dividend is paid to the common stockholders. Hence, it is a financing activity

g. Cash received from borrowing money

Financing

Cash is borrowed for funding business therefore, it is a financing activity.

i. Cash receipt from the issuance of common stock

Financing

Issuance of common stock is a financing activity.

04

Explanation for non-cash activities

Transaction

Activity

Explanation

e. Purchase of equipment in exchange for notes payable

Non-cash

Purchase of equipment in exchange for notes payable does not involve cash therefore, it is classified as non-cash transaction.

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Most popular questions from this chapter

Preparing the statement of cash flows鈥攄irect method

Diversion Rare Coins (DRC) was formed on January 1, 2018. Additional data for the year follow:

a. On January 1, 2018, DRC issued no par common stock for \(450,000.

b. Early in January, DRC made the following cash payments:

1. For store fixtures, \)46,000

2. For merchandise inventory, \(310,000

3. For rent expense on a store building, \)18,000

c. Later in the year, DRC purchased merchandise inventory on account for \(238,000. Before year-end, DRC paid \)138,000 of this accounts payable.

d. During 2018, DRC sold 2,700 units of merchandise inventory for \(400 each. Before year-end, the company collected 85% of this amount. Cost of goods sold for the year was \)340,000, and ending merchandise inventory totaled \(208,000.

e. The store employs three people. The combined annual payroll is \)97,000, of which DRC still owes \(6,000 at year-end.

f. At the end of the year, DRC paid income tax of \)18,000. There was no income taxes payable.

g. Late in 2018, DRC paid cash dividends of $35,000.

h. For store fixtures, DRC uses the straight-line depreciation method, over five years, with zero residual value.

Requirements

1. Prepare DRC鈥檚 income statement for the year ended December 31, 2018. Use the single-step format, with all revenues listed together and all expenses listed together.

2. Prepare DRC鈥檚 balance sheet at December 31, 2018.

3. Prepare DRC鈥檚 statement of cash flows for the year ended December 31, 2018. Format cash flows from operating activities by the direct method

Question: What accounts on the balance sheet must be evaluated when completing the investing activities section of the statement of cash flows?

Question: What accounts on the balance sheet must be evaluated when completing the financing activities section of the statement of cash flows?

Boundary Rare Coins (BRC) was formed on January 1, 2018. Additional data for the year follow:

  1. On January 1, 2018, BRC issued no-par common stock for \(475,000.
  2. Early in January, BRC made the following cash payments:For store fixtures, \)53,000;For merchandise inventory, \(260,000;For rent expense on the store building, \)13,000
  3. Later in the year, BRC purchased merchandise inventory on account for \(240,000. Before year-end, BRC paid \)160,000 of these accounts payable.
  4. During 2018, BRC sold 2,200 units of merchandise inventory for \(450 each. Before year-end, the company collected 85% of this amount. Cost of goods sold for the year was \)330,000, and ending merchandise inventory totaled \(170,000.
  5. The store employs three people. The combined annual payroll is \)80,000, of which BRC still owes \(4,000 at year-end.
  6. At the end of the year, BRC paid income tax of \)24,000. There are no income taxes payable.
  7. Late in 2018, BRC paid cash dividends of $40,000.
  8. For store fixtures, BRC uses the straight-line depreciation method, over five years, with zero residual value.

Requirements

  1. Prepare BRC鈥檚 income statement for the year ended December 31, 2018. Use the single-step format, with all revenues listed together and all expenses listed together.
  2. Prepare BRC鈥檚 balance sheet at December 31, 2018.
  3. Prepare BRC鈥檚 statement of cash flows for the year ended December 31, 2018. Format cash flows from operating activities by the direct method.

Jennifer鈥檚 Wedding Shops earned net income of \(27,000, which included depreciation of \)16,000. Jennifer鈥檚 acquired a \(119,000 building by borrowing \)119,000 on a long-term note payable.

Requirements

  1. How much did Jennifer鈥檚 cash balance increase or decrease during the year?
  2. Were there any non-cash transactions for the company? If so, show how

they would be reported in the statement of cash flows.
See all solutions

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