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Chapter 14: Q14-3SE (page 770)

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)

Short Answer

Expert verified

Answer

  1. Operating (O+)
  2. Financing (F-)
  3. Operating (O-)
  4. Financing (F-)
  5. Operating (O-)
  6. Operating (O+)
  7. Operating (O+)
  8. Operating (O-)
  9. Operating (O+)
  10. Investing (I-)

Step by step solution

01

Classification of activities

Transaction

Activity

a. Increase in accounts payable

Operating (O)

b. Payment of dividends

Financing (F)

c. Decrease in accrued liabilities

Operating (O)

d. Issuance of common stock

Financing (F)

e. Gain on sale of building

Operating (O)

f. Loss on sale of land

Operating (O)

g. Depreciation expense

Operating (O)

h. Increase in merchandise inventory

Operating (O)

i. Decrease in accounts receivable

Operating (O)

i. Decrease in accounts receivable

Investing (I)

02

Treatment of each transaction

Transaction

Activity

Treatment

a. Increase in accounts payable

Operating (O)

addition to net income (O+)

b. Payment of dividends

Financing (F)

cash outflow (F-)

c. Decrease in accrued liabilities

Operating (O)

subtraction from net income (O-)

d. Issuance of common stock

Financing (F)

cash outflow (F-)

e. Gain on sale of building

Operating (O)

subtraction from net income (O-)

f. Loss on sale of land

Operating (O)

addition to net income (O+)

g. Depreciation expense

Operating (O)

addition to net income (O+)

h. Increase in merchandise inventory

Operating (O)

subtraction from net income (O-)

i. Decrease in accounts receivable

Operating (O)

addition to net income (O+)

j. Purchase of equipment

Investing (I)

cash outflow (I-)

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Most popular questions from this chapter

Question: If current liabilities increase, what is the effect on cash? What about a decrease in current liabilities?

Question: 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.

The 2018 income statement and comparative balance sheet of Sweet Valley, Inc. follow:

Additionally, Sweet Valley purchased land of \(20,900 by financing it 100% with long-term notes payable during 2018. During the year, there were no sales of land, no retirements of stock, and no treasury stock transactions. A plant asset was disposed of for \)0. The cost and the accumulated depreciation of the disposed asset was $13,240. Plant asset was acquired for cash.

Requirements

1. Prepare the 2018 statement of cash flows, formatting operating activities by the indirect method.

2. How will what you learned in this problem help you evaluate an investment?

Preparing the direct method statement of cash flows Red Toy Company reported the following comparative balance sheet:

Requirements

1. Compute the collections from customers during 2018 for Red Toy Company. Sales Revenue totaled \(134,000.

2. Compute the payments for inventory during 2018. Cost of Goods Sold was \)79,000.

Preparing the direct method statement of cash flows Use the data in Short Exercise S14A-12 and your results. Prepare the business’s complete statement of cash flows for the year ended June 30, 2018, using the direct method for operating activities

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