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Chapter 14: Q14-3RQ (page 768)

Question: Describe the three basic types of cash flow activities.

Short Answer

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Answer

The three basic types of cash flow activities are operating activity, investing activity, and financing activity.

Step by step solution

01

Operating Activity

Operating activity records depreciation, depletion, operating revenue and expenses, increase in assets and liabilities, and decrease in assets and liabilities. The operating activity calculation starts with the net income.

02

Investing Activity

It includes cash receipts from and payment to sale and purchase of plant, property, and equipment, and long-term notes receivables. Investing activity only records, long-term assets.

03

Financing Activity

Financing activity records equity and long-term liabilities. It also records payments toward interest on debt and dividends to stockholders.

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Most popular questions from this chapter

Preparing operating activities cash flow—direct method

The accounting records of Four Seasons Parts reveal the following:

Payment of salaries and wages \( 34,000

Net income \) 21,000

Depreciation expense 10,000

Payment of income tax 16,000

Payment of interest 17,000

Collection of dividend revenue 5,000

Payment of dividends 5,000

Payment to suppliers 51,000

Collections from customers 116,000

Compute cash flows from operating activities using the direct method for the year ended December 31, 2018.

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

a. On January 1, 2018, CRC issued no-par common stock for \(525,000.

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

1. For store fixtures, \)51,000

2. For merchandise inventory, \(240,000

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

c. Later in the year, CRC purchased merchandise inventory on account for \(243,000. Before year-end, CRC paid \)153,000 of these accounts payable.

d. During 2018, CRC sold 2,800 units of merchandise inventory for \(325 each. Before year-end, the company collected 95% of this amount. Cost of goods sold for the year was \)290,000, and ending merchandise inventory totaled \(193,000.

e. The store employs three people. The combined annual payroll is \)82,000, of which CRC still owes \(5,000 at year-end.

f. At the end of the year, CRC paid income tax of \)17,000. There were no income taxes payable.

g. Late in 2018, CRC paid cash dividends of $38,000.

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

Requirements

1. What is the purpose of the statement of cash flows?

2. Prepare CRC’s income statement for the year ended December 31, 2018. Use the single-step format, with all revenues listed together and all expenses listed together.

3. Prepare CRC’s balance sheet at December 31, 2018.

4. Prepare CRC’s statement of cash flows using the indirect method for the year ended December 31, 2018.

Computing cash flow items—direct method Consider the following facts:

  1. Beginning and ending Accounts Receivable are \(24,000 and \)20,000, respectively. Credit sales for the period total \(68,000.
  2. Cost of goods sold is \)77,000.
  3. Beginning Merchandise Inventory balance is \(29,000, and ending Merchandise Inventory balance is \)26,000.
  4. Beginning and ending Accounts Payable are \(12,000 and \)16,000, respectively.

Requirements

  1. Compute cash collections from customers.
  2. Compute cash payments for merchandise inventory

Preparing the statement of cash flows—direct method The income statement and additional data of Value Corporation follow:

  1. Collections from customers are \(13,000 more than sales.
  2. Dividend revenue, interest expense, and income tax expense equal their cash amounts.
  3. Payments to suppliers are the sum of cost of goods sold plus advertising expense.
  4. Payments to employees are \)3,000 more than salaries expense.
  5. Cash payment for the acquisition of plant assets is \(102,000.
  6. Cash receipts from sale of land total \)29,000.
  7. Cash receipts from issuance of common stock total \(38,000.
  8. Payment of long-term notes payable is \)10,000.
  9. Payment of dividends is \(9,000.
  10. Cash balance at June 30, 2017, was \)21,000; at June 30, 2018, it was $43,000.
    Prepare Value Corporation’s statement of cash flows for the year ended June 30, 2018. Use the direct method.

Preparing the statement of cash flows—indirect method The income statement of Boost Plus, Inc. follows: Gross Profit Net Sales Revenue Cost of Goods Sold Salaries Expense 137,000 94,000 3,000 56,000 \( 54,000 81,000 Depreciation Expense––Plant Assets Net Income Before Income Taxes Income Tax Expense Net Income Total Operating Expenses 27,000 \) 53,000 BOOST PLUS, INC. Income Statement Year Ended September 30, 2018 Operating Expenses: \( 231,000 Additional data follow: a. Acquisition of plant assets is \)124,000. Of this amount, \(108,000 is paid in cash and \)16,000 by signing a note payable. b. Cash receipt from sale of land totals \(20,000. There was no gain or loss. c. Cash receipts from issuance of common stock total \)36,000. d. Payment of notes payable is \(15,000. e. Payment of dividends is \)5,000. f. From the balance sheet: September 30 2018 2017 Cash \( 39,000 \) 13,000 Accounts Receivable 46,000 61,000 Merchandise Inventory 94,000 88,000 Land 82,000 102,000 Plant Assets 214,000 90,000 Accumulated Depreciation (61,000) (34,000) Accounts Payable 32,000 15,000 Accrued Liabilities 12,000 20,000 Notes Payable (long-term) 16,000 15,000 Common Stock, no par 40,000 4,000 Retained Earnings 314,000 266,000 Prepare Boost Plus’s statement of cash flows for the year ended September 30, 2018, using the indirect method. Include a separate section for non-cash investing and financing activities
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