Exercise 1. Classification of Cash Flow 2
Exercise 1. Classification of Cash Flow 2
Exercise 1. Classification of Cash Flow 2
1. Operating activities: It includes those transactions which affect the working capital, and it
records transactions of cash receipts and cash payments.
2. Investing activities: It records those activities which include purchase and sale of the long term
assets
3. Financing activities: It records those activities which affect the long term liability and
shareholder equity balance.
3. Issued 500 shares of preferred stock for $45,000 - cash flow from financing activity
4. Sold land and a building for $250,000 - cash flow from investing activity
5. Loaned $30,000 to Dead End Corporation, receiving Dead End’s 1-year, 12% note. - cash flow
from investing activity
13.2: Jojo Photography reported net income of $100,000 for 2014. Included in the income statement
were depreciation expense of $4,000, amortization expense of $3,000, and a gain on disposal of plant
assets of $3,900. Jojo’s comparative balance sheets show the following balances.
12/31/13 12/31/14
Accounts receivable $27,000 $21,000
Accounts payable 6,000 9,200
Now,
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Net income $100,000
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Net cash flow $132,10
CHAP 13 EXERCISE
Operating Activities:
Investing Activities:
Financing Activities:
c) Issued $200,000 par value common stock upon conversion of bonds having a face value of
$200,000.
Manufacturing
Distribution
Marketing
Selling.
The financing activities deal with the acquisition and repayment of finance, and payment of returns
(interests and dividends).
The investing activities are the acquisition and sale of long-term assets and investments.
Finally, the non-cash investing and financing activities refer to investing and financing
activities that do no involve cash movements.
E13-2 An analysis of comparative balance sheets, the current year’s income statement,
and the general ledger accounts of Solomon Corp. uncovered the following items. Assume
all items involve cash unless there is information to the contrary.
(a) Payment of interest on notes payable.
(h) Issuance of capital stock.
(b) Exchange of land for patent.
(i) Amortization of patent.
(c) Sale of building at book value.
(j) Issuance of bonds for land.
(d) Payment of dividends.
(k) Purchase of land.
(e) Depreciation.
(l) Conversion of bonds into common stock.
(f) Receipt of dividends on investment
(m) Loss on sale of land.
in stock.
(n) Retirement of bonds.
(g) Receipt of interest on notes receivable.
Instructions: Indicate how each item should be classified in the statement of cash flows using these
four major classifications: operating activity (indirect method), investing activity, financing activity,
and significant noncash investing and financing activity.
(b) Exchange of land for patent = Non cash investing activity as it does not involve cash transactions
(c) Sale of building at book value = Investing activities as cash inflow which is represented in a
positive sign
(d) Payment of dividends = Financing activities as cash outflow which is represented in a negative
sign
(i) Amortization of patent = Operating activities as cash inflow and added to the net income
(j) Issuance of bonds for land - Non-cash investing and financing
activity as it does not involve any cash transaction
(k) Purchase of land - Investing activity
(l) Conversion of bonds into common stock - Non-cash investing
and financing activity as it does not involve any cash transaction
(m) Loss on sale of land - Operating activity
(n) Retirement of bonds - Financing activity
E13-4 Bracewell Company reported net income of $195,000 for 2014. Bracewell also reported
depreciation expense of $40,000 and a gain of $5,000 on disposal of plant assets. The comparative
balance sheet shows an increase in accounts receivable of $15,000 for the year, a $17,000 increase in
accounts payable, and a $4,000 decrease in prepaid expenses.
Instructions: Prepare the operating activities section of the statement of cash fl ows for 2014. Use
the indirect method.
E13-5 The current sections of Nasreen Inc.’s balance sheets at December 31, 2013 and 2014, are
presented here. Nasreen’s net income for 2014 was $153,000. Depreciation expense was $24,000.
Current assets
2014 2013
Cash $105,000 $ 99,000
Accounts receivable 110,000 79,000
Inventory 158,000 172,000
Prepaid expenses 27,000 25,000
Total current assets $400,000 $375,000
Current liabilities
Accrued expenses payable $15,000 $9,000
Accounts payable 85,000 95,000
Total current liabilities $100,000 $104,000
Instructions: Prepare the net cash provided by operating activities section of the company’s
statement of cash flows for the year ended December 31, 2014, using the indirect method.
E13-6 The three accounts shown below appear in the general ledger of Chaudry Corp. during 2014.
Meera Corporation
Comparative Balance Sheets
December 31
2014 2013
Cash $ 14,700 $ 10,700
Accounts receivable 20,800 23,400
Land 20,000 26,000
Buildings 70,000 70,000
Accumulated depreciation—buildings (15,000) (10,000)
Total $110,500 $120,100
Additional information:
1.Net income was $22,630. Dividends declared and paid were $19,500.
2. All other changes in noncurrent account balances had a direct effect on cash flows, except the
change in accumulated depreciation. The land was sold for $5,000.
Instructions (a) Prepare a statement of cash flows for 2014 using the indirect method.
(b) Compute free cash flow.
Accounts payable
$ 14,600 $ 11,100
Bonds payable
10,000 30,000
Common stock
50,000 45,000
Retained earnings
33,600 29,900
Total
$108,200 $116,000
Additional information:
1. Net income was $18,300. Dividends declared and paid were $14,600.
2. Equipment which cost $10,000 and had accumulated depreciation of $1,800 was sold for $3,500.
3. All other changes in noncurrent account balances had a direct effect on cash flows, except the
change in accumulated depreciation.
Instructions (a) Prepare a statement of cash flows for 2014 using the indirect method.
(b) Compute free cash flow.
*E13-10 Comparative balance sheets for Erisa Magambo Company are presented below.
Additional information:
1. Net income for 2014 was $120,000.
2. Cash dividends of $70,000 were declared and paid.
3. Bonds payable amounting to $50,000 were redeemed for cash $50,000.
4. Common stock was issued for $50,000 cash.
5. Depreciation expense was $24,000.
6. Sales for the year were $978,000.
Instructions: Prepare a worksheet for a statement of cash flows for 2014 using the indirect method.
Enter the reconciling items directly on the worksheet, using letters to cross-reference each entry.
*E13-11 Dumezweni Company completed its first year of operations on December 31, 2014.
Its initial income statement showed that Dumezweni had revenues of $195,000 and operating
expenses of $78,000. Accounts receivable and accounts payable at year-end were $60,000 and
$25,000, respectively. Assume that accounts payable related to operating expenses. (Ignore income
taxes.)
Instructions: Compute net cash provided by operating activities using the direct method.
*E13-12 A recent income statement for McDonald’s Corporation shows cost of goods sold
$4,527.8 million and operating expenses (including depreciation expense of $1,120 million)
$10,517.6 million. The comparative balance sheet for the year shows that inventory increased
$17.1 million, prepaid expenses increased $65.3 million, accounts payable (merchandise suppliers)
increased $139.6 million, and accrued expenses payable increased $190.6 million.
Instructions: Using the direct method, compute (a) cash payments to suppliers and (b) cash
payments for operating expenses.
*E13-13 The 2014 accounting records of Liz Ten Transport reveal these transactions and events.
Collection of accounts receivable $190,000
Payment of interest $10,000
Payment of salaries and wages 57,000
Cash sales 50,000
Depreciation expense 16,000
Receipt of dividend revenue 18,000
Proceeds from disposal of plant assets 12,000
Payment of income taxes 16,000
Purchase of equipment for cash 22,000
Net income 38,000
Loss on disposal of plant assets 3,000
Payment of accounts payable for merchandise 115,000
Payment of dividends 14,000
Payment for land 74,000
Payment of operating expenses 28,000
Instructions: Prepare the cash flows from operating activities section using the direct method. (Not
all of the items will be used.)
*E13-14 The following information is taken from the 2014 general ledger of Okonedo Company.
Rent expense
$ 40,000
Prepaid rent, January 1
Rent 5,600
Prepaid rent, December 31
9,000
Salaries and wages expense $ 65,000
Salaries Salaries and wages payable, January 1 10,000
Salaries and wages payable, December 31 8,000
Sales revenue $170,000
Sales Accounts receivable, January 1 19,000
Accounts receivable, December 31 7,000
Instructions: In each case, compute the amount that should be reported in the operating activities
section of the statement of cash flows under the direct method.