Week One Assignment
Exercises
Classification of activities
Classify each of the following transactions as arising from an operating (O), investing (I), financing (F), or noncash investing/financing (N) activity:
________ | a. Received $80,000 from the sale of land |
________ | b. Received $3,200 from cash sales |
________ | c. Paid a $5,000 dividend |
________ | d. Purchased $8,800 of merchandise for cash |
________ | e. Received $100,000 from the issuance of common stock |
________ | f. Paid $1,200 of interest on a note payable |
________ | g. Acquired a new laser printer by paying $650 |
________ | h. Acquired a $400,000 building by signing a $400,000 mortgage note |
Indirect calculation of operating cash flows
Video Corporation's balance sheet revealed the following account balance information:
Account | Dec. 31, 20X6 | Dec. 31, 20X5 |
Accounts receivable | $52,000 | $57,000 |
Merchandise inventory | 75,000 | 68,000 |
Accounts payable | 21,000 | 19,500 |
The accrual-basis net income was $107,000. In computing net income, the company recorded $12,600 of depreciation expense; there were no gains or losses from investing and financing activities.
On the basis of the preceding information, calculate Video's cash flows from operating activities by using the indirect method.
Indirect calculation of operating cash flows
Specialty Services Inc. reported a net income of $110,000 for the year just ended, which includes an $18,000 gain on the sale of long-term investments. The following data were obtained from comparative balance sheets:
| Oct. 31, 20X2 | Oct. 31, 20X1 |
Trade accounts receivable | $245,000 | $203,000 |
Merchandise inventory | 230,000 | 308,000 |
Accumulated depreciation: equipment | 120,000 | 65,000 |
Accounts payable | 190,000 | 124,000 |
Accrued liabilities | 38,000 | 73,000 |
There were no purchases or disposals of equipment during the year. The long-term investment had a carrying (book) value of $77,000 and was sold for cash on June 15.
On the basis of the preceding information, determine the cash provided by operating activities from November 1, 20X1 through October 31, 20X2. The firm uses the indirect method of statement preparation.
Overview of direct and indirect methods
Evaluate the comments that follow as being true or false. If the comment is false, briefly explain why.
Both the direct method and the indirect method will produce the same cash flow from operating activities.
Depreciation expense is added back to net income when the indirect method is used.
One of the advantages of using the direct method rather than the indirect method is that larger cash flows from financing activities will be reported.
The cash paid to suppliers is normally disclosed on the statement of cash flows when the indirect method of statement preparation is employed.
The dollar change in the Merchandise Inventory account appears on the statement of cash flows only when the direct method of statement preparation is used.
Statement preparation: Direct method
The comparative balance sheets of Village Company follow:
VILLAGE COMPANY | ||
Dec. 31, 20X2 | Dec. 31, 20X1 | |
Cash | $ 5,000 | $ 7,000 |
Accounts receivable (net) | 12,000 | 18,000 |
Merchandise inventory | 35,000 | 28,000 |
Property, plant, & equipment | 40,000 | 30,000 |
Less: Accumulated depreciation | (17,000) | (10,000) |
Total assets | $ 75,000 | $ 73,000 |
Accounts payable* | $ 25,000 | $ 21,000 |
Income taxes payable | 4,000 | 1,000 |
Common stock | 24,000 | 24,000 |
Retained earnings | 22,000 | 27,000 |
Total liabilities & stock, equity | $ 75,000 | $ 73,000 |
*Relate to purchases of merchandise |
The firm's accrual-basis income statement revealed the following data: sales, $120,000; cost of goods sold, $80,000; selling and administrative expenses, $25,000; depreciation expense, $7,000; and income taxes, $3,000. (There was no interest expense.) Dividends declared and paid during 20X2 totaled $10,000. Finally, Village purchased $10,000 of equipment for cash on August 14.
Determine the increase or decrease in cash during 20X2.
Prepare a statement of cash flows by using the direct method.
Equipment transaction and cash flow reporting
The property, plant, and equipment section of ProComp Inc.'s comparative balance sheet follows:
| Dec. 31, 20X4 | Dec. 31, 20X3 |
Property, plant, & equipment | ||
Land | $ 94,000 | $ 94,000 |
Equipment | 652,000 | 527,000 |
Less: Accumulated depreciation | (316,000) | (341,000) |
New equipment purchased during 20X4 totaled $280,000. The 20X4 income statement disclosed equipment depreciation expense of $41,000 and a $9,000 loss on the sale of equipment.
Determine the cost and accumulated depreciation of the equipment sold during 20X4.
Determine the selling price of the equipment sold.
Show how the sale of equipment would appear on a statement of cash flows prepared by using the indirect method.
Evaluation of cash flows
The following statement of cash flows was prepared for Yellowstone Company:
YELLOWSTONE COMPANY | ||
Cash flows from operating activities | ||
Cash received from customers | $240,000 | |
Less cash payments for: | ||
Purchases of merchandise | $180,000 | |
Selling & administrative expenses | 75,000 | |
Interest | 20,000 | 275,000 |
Net cash used by operating activities | $ (35,000) | |
Cash flows from investing activities | ||
Sale of equipment | $ 20,000 | |
Sale of vehicles | 10,000 | |
Sale of long-term investments | 40,000 | |
Net cash provided by investing act | 70,000 | |
Cash flows from financing activities | ||
Retirement of long-term debt | (50,000) | |
Net increase (decrease) in cash | $ (15,000) | |
Cash balance, January 1, 20X2 | 54,000 | |
Cash balance, December 31, 20X2 | $ 39,000 |
Evaluate the nature of the decrease in cash. Does your analysis indicate any potential problems for Yellowstone?
Problems
Transaction analysis: Operating, investing, and financing activities
The management of Maui Corporation desires to know the nature of each of the following transactions and events:Collected cash from customers for cash sales.
Purchased a short-term investment for cash.
Secured a mortgage note to finance the acquisition of a building.
Issued 10-year bonds for cash.
Paid a short-term nonoperating note.
Sold equipment having a book value of $30,000 for $30,000 cash.
Sold a parcel of land at cost; received a long-term note.
Received dividends on a long-term stock investment.
Paid income taxes.
Issued preferred stock in exchange for a valuable patent.
Reacquired treasury stock for cash.
Paid previously declared cash dividends.
Instructions
Briefly explain the difference between investing and financing activities and noncash investing/financing activities.
Design a table with the following columnar headings: operating activity, investing activity, financing activity, and noncash investing/financing activity. Classify the 12 transactions listed by using these headings. For all classifications except noncash investing/financing, indicate whether the transaction causes a cash inflow (+) or a cash outflow (−).
Operating activities: Direct and indirect methods
The 20X5 income statement of Office Products Inc. follows:OFFICE PRODUCTS INC.
Income Statement
for the Year Ended December 31, 20X5Net sales
$980,000
Cost of goods sold
Beginning inventory
$235,000
Net purchases
720,000
Goods available for sale
$955,000
Less: Ending inventory
260,000
Cost of goods sold
695,000
Gross profit
$285,000
Expenses
Selling & administrative
$149,000
Depreciation
54,000
203,000
$ 82,000
Other revenue (expense)
Interest expense
$ (18,000)
Gain on sale of equipment
26,000
8,000
Income before income taxes
$ 90,000
Income taxes
27,000
Net income
$ 63,000
The following additional information was obtained from the general ledger and management personnel:
Accounts payable related to the purchases of merchandise decreased during 20X5 by $32,800. In contrast, accounts receivable increased by $23,700.
Prepaid expenses and wages payable increased throughout 20X5 by $2,400 and $5,600, respectively.
The balance in the income taxes payable account on January 1 was $4,900; the December 31 balance was $4,100.
The company financed a $78,000 equipment purchase by signing a note payable that is due in 20X8.
Instructions
Prepare the operating activities section of the statement of cash flows by using the direct method.
Prepare the operating activities section of the statement of cash flows by using the indirect method.
Cash flow information: Direct and indirect methods
The comparative year-end balance sheets of Sign Graphics Inc. revealed the following activity in the company's current accounts:20X5
20X4
Increase
(decrease)Current assets
Cash
$ 55,400
$ 35,200
$ 20,200
Accounts receivable (net)
83,800
88,000
(4,200)
Inventory
243,400
233,800
9,600
Prepaid expenses
25,400
24,200
1,200
Current liabilities
Accounts payable
$ 123,600
$140,600
$(17,000)
Taxes payable
43,600
49,200
(5,600)
Interest payable
9,000
6,400
2,600
Accrued liabilities
38,800
60,400
(21,600)
Note payable
44,000
—
44,000
The accounts payable were for the purchase of merchandise. Prepaid expenses and accrued liabilities relate to the firm's selling and administrative expenses. The company's condensed income statement follows:
SIGN GRAPHICS INC.
Income Statement
for the Year Ended December 31, 20X5Sales
$713,800
Less: Cost of goods sold
323,000
Gross profit
$390,800
Less: Selling & administrative expenses
$186,000
Depreciation expense
17,000
Interest expense
27,000
230,000
Add: Gain on sale of land
$160,800
21,800
Income before taxes
$182,600
Income taxes
36,800
Net income
$145,800
Other data:
Long-term investments were purchased for cash at a cost of $74,600.
Cash proceeds from the sale of land totaled $76,200.
Store equipment of $44,000 was purchased by signing a short-term note payable. Also, a $150,000 telecommunications system was acquired by issuing 3,000 shares of preferred stock.
A long-term note of $49,400 was repaid.
Twenty thousand shares of common stock were issued at $5.19 per share.
The company paid cash dividends amounting to $128,600.
Instructions
Prepare the operating activities section of the company's statement of cash flows, assuming use of
1) the direct method.
2) the indirect method.Prepare the investing and financing activities sections of the statement of cash flows.