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Chapter 14: Q14-3RQ (page 768)
Question: Describe the three basic types of cash flow activities.
Answer
The three basic types of cash flow activities are operating activity, investing activity, and financing activity.
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Question: Classifying items on the indirect statement of cash flows
Destiny Corporation is preparing its statement of cash flows by the indirect method. Destiny has the following items for you to consider in preparing the statement:
a. Increase in accounts payable
b. Payment of dividends
c. Decrease in accrued liabilities
d. Issuance of common stock
e. Gain on sale of building
f. Loss on sale of land
g. Depreciation expense
h. Increase in merchandise inventory
i. Decrease in accounts receivable
j. Purchase of equipment
Identify each item as a(n): • Operating activity—addition to net income (O+) or subtraction from net income (O-) • Investing activity—cash inflow (I+) or cash outflow (I-) • Financing activity—cash inflow (F+) or cash outflow (F-) • Activity that is not used to prepare the indirect statement of cash flows (N)
Preparing operating activities using the direct method Amy’s Learning Center has assembled the following data for the year ended June 30, 2018:
Payments to suppliers $ 115,000
Cash payment for purchase of equipment 39,000
Payments to employees 66,000
Payment of notes payable 34,000
Payment of dividends 7,500
Cash receipt from issuance of stock 22,000
Collections from customers 188,000
Cash receipt from sale of land 58,000
Cash balance, June 30, 2017 41,000 Prepare the operating activities section of the business’s statement of cash flows for the year ended June 30, 2018, using the direct method.
Question: How does the direct method differ from the indirect method when preparing the operating activities section of the statement of cash flows?
Computing operating activities cash flow—indirect method
The records of Vintage Color Engraving reveal the following:
Net income \( 36,000
Depreciation expense \) 5,000
Sales revenue 53,000
Decrease in current liabilities 19,000
Loss on sale of land 4,000
Increase in current assets other than cash 10,000
Acquisition of land 35,000
Compute cash flows from operating activities by the indirect method for year ended December 31, 2018.
Question: Describe the five steps used to prepare the statement of cash flows by the indirect method.
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