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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

Why might a spreadsheet be helpful when completing 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: If current assets other than cash increase, what is the effect on cash? What about a decrease in current assets other than cash?

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.

Question: What is free cash flow, and how is it calculated?
See all solutions

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