Exercise 1. Classification of Cash Flow 2

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CHAP 13: DO IT

13.1: Piekarski Corporation had the following transactions.


1. Issued $200,000 of bonds payable.
2. Paid utilities expense.
3. Issued 500 shares of preferred stock for $45,000.
4. Sold land and a building for $250,000.
5. Lent $30,000 to Zarembski Corporation, receiving Zarembski’s 1-year, 12% note.
Classify each of these transactions by type of cash fl ow activity (operating, investing, or financing).
Basically there are three types of activities:

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.

So the categorization is shown below:

1. Issued $200,000 of bonds payable - cash flow from financing activity

2. Paid utilities expense - cash flow from operating activity

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

Reported net income = $100,000

Depreciation expense = $4,000

Patent amortization expense = $3,000

Gain on disposal of plant assets = $3,900

Decrease in account receivables = $27,000- $21,000 = $26,000

Increase in payable = $9,200 - $6,000= $3,200

Now,

The cash flow

-----------------------------------------------------------------
Net income $100,000

Depreciation expense - $4,000

Patent amortization expense $3,000

Gain on disposal of plant assets $3,900

Decrease in account receivables $26,000

Increase in payable $3,200

------------------------------------------------------------------
Net cash flow $132,10

CHAP 13 EXERCISE

E13-1 Quarshee Corporation had these transactions during 2014.


(a) Issued $50,000 par value common stock for cash.
(b) Purchased a machine for $30,000, giving a long-term note in exchange.
(c) Issued $200,000 par value common stock upon conversion of bonds having a face
value of $200,000.
(d) Declared and paid a cash dividend of $18,000.
(e) Sold a long-term investment with a cost of $15,000 for $15,000 cash.
(f) Collected $16,000 of accounts receivable.
(g) Paid $18,000 on accounts payable.
Instructions: Analyze the transactions and indicate whether each transaction resulted in a cash flow
from operating activities, investing activities, financing activities, or noncash investing and financing
activities.
the analysis of Kiley Corporation's 2022 transactions, indicating whether each transaction is
an operating activity, investing activity, financing activity, or noncash investing and financing
activity, is as follows:

Operating Activities:

f) Collected $16,000 from sale of goods.

g) Paid $18,000 to suppliers

Investing Activities:

e) Sold a long-term investment with a cost of $15,000 for $15,000 cash.

Financing Activities:

b) Issued $50,000 par value common stock for cash.

d) Declared and paid a cash dividend of $16,000.

Noncash Investing and Financing Activities:

a) Purchased a machine for $30,000, giving a long-term note in exchange.

c) Issued $200,000 par value common stock upon conversion of bonds having a face value of
$200,000.

What are the operating activities?


The operating activities refer to the company's core business activities, including

 Manufacturing
 Distribution
 Marketing
 Selling.

What are the financing activities?

The financing activities deal with the acquisition and repayment of finance, and payment of returns
(interests and dividends).

What are the investing activities?

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.

1. Operating activities: It includes those transactions which


affect the working capital after net income. The increase in
current assets and a decrease in current liabilities would be
deducted whereas the decrease in current assets and an
increase in current liabilities would be added.
These changes in working capital would be adjusted. Moreover,
the depreciation expense is added to the net income and the
dividend and interest is received is recorded in this activity.
The loss and gain on sale of the assets is also recorded and
amortization on intangible asset is also recorded
2. Investing activities: It records those activities which include
purchase and sale of the long term assets. The purchase is an
outflow of cash whereas sale is an inflow of cash
3. Financing activities: It records those activities which affect
the long term liability and shareholder equity balance. The issue
of shares is an inflow of cash whereas redemption and dividend
is an outflow of cash.

The classification are as follows

(a) Payment of interest on notes payable = Operating activities as cash outflow

(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

(e) Depreciation = It is added to net income and shown in operating activities

(f) Receipt of dividends on investment in stock = Operating activities as cash inflow

(g) Receipt of interest on notes receivable = Operating activities as cash inflow

(h) Issuance of common stock = Financing activities as cash outflow

(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

E13-3 Tim Latimer Corporation had the following transactions.


1. Sold land (cost $12,000) for $10,000.
2. Issued common stock for $22,000.
3. Recorded depreciation on buildings for $14,000.
4. Paid salaries of $7,000.
5. Issued 1,000 shares of $1 par value common stock for equipment worth $9,000.
6. Sold equipment (cost $10,000, accumulated depreciation $8,000) for $3,200.
Instructions : For each transaction above, (a) prepare the journal entry, and (b) indicate how it
would affect the statement of cash flows under the indirect method.

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.

E13-7 Meera Corporation’s comparative balance sheets are presented below.

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

Accounts payable $ 12,370 $ 28,100


Common stock 75,000 72,000
Retained earnings 23,130 20,000
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.

E13-8 Here are comparative balance sheets for Syal Company.


Syal Company
Comparative Balance Sheets
December 31

Assets 2014 2013


Cash $ 73,000 $ 33,000
Accounts receivable 85,000 71,000
Inventory 170,000 187,000
Land 73,000 100,000
Equipment 260,000 200,000
Accumulated depreciation—equipment (66,000) (34,000)
Total $595,000 $557,000

Liabilities and Stockholders’ Equity


Accounts payable $ 35,000 $ 47,000
Bonds payable 150,000 200,000
Common stock ($1 par) 216,000 174,000
Retained earnings 194,000 136,000
Total $595,000 $557,000
Additional information:
1. Net income for 2014 was $103,000.
2. Depreciation expense was $32,000.
3. Cash dividends of $45,000 were declared and paid.
4. Bonds payable amounting to $50,000 were redeemed for cash $50,000.
5. Common stock was issued for $42,000 cash.
6. No equipment was sold during 2014.
7. Land was sold for its book value of $27,000.
Instructions: Prepare a statement of cash flows for 2014 using the indirect method.

E13-9 Cassandra Corporation’s comparative balance sheets are presented below.


Cassandra Corporation
Comparative Balance Sheets
December 31
2014 2013
Cash $ 17,000 $ 17,700
Accounts receivable 25,200 22,300
Investments 20,000 16,000
Equipment 60,000 70,000
Accumulated depreciation—equipment (14,000) (10,000)
Total $108,200 $116,000

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.

Erisa Magambo Company


Comparative Balance Sheets
December 31

Assets 2014 2013


Cash
$ 58,000 $ 22,000
Accounts receivable
85,000 76,000
Inventory
180,000 187,000
Land
75,000 100,000
Equipment
250,000 200,000
Accumulated depreciation—equipment
(66,000) (42,000)
Total
$582,000 $543,000
Liabilities and Stockholders’ Equity
34,000 45,000
Accounts payable
150,000 200,000
Bonds payable
214,000 164,000
Common stock ($1 par)
184,000 134,000
Retained earnings
$582,000 $543,000
Total

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.

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