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Chapter 23: Q3Q (page 1371)

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鈥檚 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: (SCF Theory and Analysis of Improper SCF) Teresa Ramirez and Lenny Traylor are examining the following statement of cash flows for Pacific Clothing Store鈥檚 first year of operations.


PACIFIC CLOTHING STORE

STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED JANUARY 31, 2017

Sources of cash

From sales of merchandise

\(382,000

From sale of common stock

380,000

From sale of investment

120,000

From depreciation

80,000

From issuance of note for truck

30,000

From interest on investments

8,000

Total sources of cash

1,000,000

Uses of cash

For purchase of fixtures and equipment

330,000

For merchandise purchased for resale

253,000

For operating expenses (including depreciation)

170,000

For purchase of investment

95,000

For purchase of truck by issuance of note

30,000

For purchase of treasury stock

10,000

For interest on note

3,000

Total uses of cash

891,000

Net increase in cash

\)109,000

Teresa claims that Pacific鈥檚 statement of cash flows is an excellent portrayal of a superb first year, with cash increasing \(109,000. Lenny replies that it was not a superb first year鈥攖hat the year was an operating failure, the statement was incorrectly presented, and \)109,000 is not the actual increase in cash.

Instructions

(a) With whom do you agree, Teresa or Lenny? Explain your position.

(b) Using the data provided, prepare a statement of cash flows in proper indirect method form. The only noncash items in income are depreciation and the gain from the sale of the investment (purchase and sale are related).

Question; In the case of a bank overdraft:

  1. GAAP typically includes the amount in cash and cash equivalents.
  2. IFRS typically includes the amount in cash equivalents but not in cash.
  3. GAAP typically treats the overdraft as a liability, and reports the amount in the financing section of the statement of cash flows.
  4. IFRS typically treats the overdraft as a liability, and reports the amount in the investing section of the statement of cash flows.

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鈥檚 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.

Dingel Corporation has contracted with you to prepare a statement of cash flows. The controller has provided the following information.

December 31

2017

2016

Buildings

\( 鈥�0鈥�

\)29,750

Equipment

45,000

20,000

Patents

5,000

6,250

Investments

鈥�0鈥�

3,000

Inventory

12,000

9,000

Accounts receivable

12,250

10,000

Cash

33,500

13,000

\(107,750

\)91,000

Share capital鈥攐rdinary

\( 43,000

\)33,000

Retained earnings

20,750

6,000

Allowance for doubtful accounts

3,000

4,500

Accumulated depreciation on equipment

2,000

4,500

Accumulated depreciation on buildings

鈥�0鈥�

6,000

Accounts payable

5,000

3,000

Dividends payable

鈥�0鈥�

5,000

Long-term notes payable

31,000

25,000

Notes payable, short-term (non-trade)

3,000

4,000

\(107,750

\)91,000

Additional data related to 2017 are as follows.

  1. Equipment that had cost \(11,000 and was 40% depreciated at the time of disposal was sold for \)2,500.
  2. \(10,000 of the long-term notes payable was paid by issuing ordinary shares.
  3. Cash dividends paid were \)5,000.
  4. On January 1, 2017, the building was completely destroyed by a flood. Insurance proceeds on the building were \(32,000.
  5. Equity investments (non-trading) were sold at \)1,700 above their cost.
  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.

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.
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