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Chapter 5: Q24Q. (page 238)

Differentiate between operating activities, investing activities, and financing activities.

Short Answer

Expert verified

Operating activities include all the transactions used in determining net income having a cash effect. Investing activities include acquiring and disposing of fixed assets and investments for cash.Financing activities include capital generating activities.

Step by step solution

01

Definition of Fixed Assets

All the assets or resources acquired to use in business operations for the long run and generating benefits are fixed assets.

02

Difference between all three activities reported in the statement of cash flow

  1. The operating activities section of the balance sheet reports ordinary business functions. It includes changes in current assets and liabilities and non-cash expenses.
  2. Investing activities include only the transaction providing a cash sale and purchase of fixed assets or investments.
  3. Financing activities include issuing and redeeming securities of any type for cash.

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Most popular questions from this chapter

Case 1: Uniroyal Technology Corporation

Uniroyal Technology Corporation (UTC), with corporate offices in Sarasota, Florida, is organized into three operating segments. The high-performance plastics segment is responsible for research, development, and manufacture of a wide variety of products, including orthopedic braces, graffiti-resistant seats for buses and airplanes, and a static-resistant plastic used in the central processing units of microcomputers. The coated fabrics segment manufactures products such as automobile seating, door and instrument panels, and specialty items such as waterproof seats for personal watercraft and stain-resistant, easy-cleaning upholstery fabrics. The foams and adhesives segment develops and manufactures products used in commercial roofing applications.

The following items relate to operations in a recent year.

1. Serious pressure was placed on profitability by sharply increasing raw material prices. Some raw materials increased in price 50% during the past year. Cost containment programs were instituted and product prices were increased whenever possible, which resulted in profit margins actually improving over the course of the year.

2. The company entered into a revolving credit agreement, under which UTC may borrow the lesser of \(15,000,000 or 80% of eligible accounts receivable. At the end of the year, approximately \)4,000,000 was outstanding under this agreement. The company plans to use this line of credit in the upcoming year to finance operations and expansion.

Instructions

(a) Should investors be informed of raw materials price increase, such as described in item 1? Does the fact that the company successfully met the challenge of higher prices affect the answer? Explain.

(b) How should the information in item 2 be presented in the financial statements of UTC?

EXCEL (Balance Sheet Preparation) Presented below are a number of balance sheet items for Montoya, Inc., for the current year, 2017.

Goodwill

\(125,000

Accumulated depreciation - equipment

\)292,000

Payroll tax payable

177,591

Inventory

239,800

Bond payable

300,000

Rent payable (short-term)

45,000

Discount on bond payable

15,000

Income tax payable

98,362

Cash

360,000

Rent payable (long-term)

480,000

Land

480,000

Common stock, \(1 par value

200,000

Notes receivable

445,700

Preferred stock, \)10 par value

150,000

Note payable

265,000

Prepaid expenses

87,920

Account payable

490,000

Equipment

1,470,000

Retained earnings

Debt investment (trading)

121,000

Income tax receivable

97,630

Accumulated depreciation – building

270,200

Note payable (Long-term)

1,600,000

Buildings

1,640,000

Instructions

Prepare a classified balance sheet in good form. Common stock authorized was 400,000 shares, and preferred stock authorized was 20,000 shares. Assume that notes receivable and notes payable are short-term unless stated otherwise. The cost and fair value of equity investments (trading) are the same.

What is the purpose of a free cash flow analysis?

Kathleen Battle says, “Retained earnings should be reported as an asset, since it is earnings which are reinvested in the business.” How would you respond to Battle?

BE5-7 (L03) Thomas Corporation’s adjusted trial balance contained the following liability accounts at December 31, 2017: Bonds Payable (due in 3 years) \(100,000, Accounts Payable \)72,000, Notes Payable (due in 90 days) \(22,500, Salaries and Wages Payable \)4,000, and Income Taxes Payable $7,000. Prepare the current liabilities section of the balance sheet.
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