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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

(Presentation of Property, Plant, and Equipment) Carol Keene, corporate comptroller for Dumaine Industries, is trying to decide how to present “Property, plant, and equipment” in the balance sheet. She realizes that the statement of cash flows will show that the company made a significant investment in purchasing new equipment this year, but overall she knows the company’s plant assets are rather old. She feels that she can disclose one figure titled “Property, plant, and equipment, net of depreciation,” and the result will be a low figure. However, it will not disclose the age of the assets. If she chooses to show the cost less accumulated depreciation, the age of the assets will be apparent. She proposes the following.

Particular

Amount \(

Property, Plant, and Equipment (net of depreciation)

\)10,000,000

Rather than

Particular

Amount \(

Property, Plant, and Equipment

\)50,000,000

Less: Accumulated depreciation

(40,000,000)

Net book value

$10,000,000

Instructions

Answer the following questions.

(a) What are the ethical issues involved?

(b) What should Keene do?

IFRS5-3 Briefly describe the convergence efforts related to financial statement presentation.

Presented below is the balance sheet for Tomkins plc, a British company.

Tomkins plc Consolidated Balance Sheet (amounts in £ million)

Particular

Amount £

Non-Current Assets

Goodwill

436

Other tangible assets

78

Property, plant, and equipment

1,122.80

Investment in associates

20.6

Trade and other receivables

81.1

Deferred tax assets

82.9

Post-employment benefits surpluses

1.3

1,822.7

Current assets

Inventories

590.8

Trade and other receivables

753

Income tax recoverable

49

Available for sale investment

1.2

Cash and Cash equivalents

445

1,839

Assets held for sale

11.9

Total assets

3,673.6

Current liabilities

Bank overdraft

4.8

Bank and other loans

11.2

Obligations under finance leases

1

Trade and other payables

677.6

Income tax liabilities

15.2

Provisions

100.3

810.1

Non-Current liabilities

Bank and other loans

687.3

Obligations under financial leases

3.6

Trade and other payables

27.1

Post-Employment benefits obligations

343.5

Deferred tax liabilities

25.3

Income tax liabilities

79.5

Provisions

19.2

1,185.5

Total liabilities

1,995.6

Net assets

1,678

Capital reserve

Ordinary share capital

79.6

Share premium account

799.2

Own shares

(8.2)

Capital redemption reserve

921.8

Currency translation reserve

(93)

Available for sale reserve

(0.9)

Accumulated deficit

(161.9)

Shareholder’s equity

1,536.6

Minority interest

141.4

Total equity

1,678

Instructions

(a) Identify at least three differences in balance sheet reporting between British and U.S. firms, as shown in Tomkins’ balance sheet.

(b) Review Tomkins’ balance sheet and identify how the format of this financial statement provides useful information, as illustrated in the chapter.

The comparative balance sheets of Constantine Cavamanlis Inc. at the beginning and the end of the year 2017 are as follows.

CONSTANTINE CAVAMALIS INC

BALANCE SHEETS

Assets

Dec 31, 2017

Jan 1, 2017

Inc./Dec.

Cash

\(45,000

\)13,000

\(32,000 Inc.

Accounts receivable

91,000

88,000

3,000 Inc.

Equipment

39,000

22,000

17,000 Inc.

Less: Accumulated depreciation – Equipment

(17,000)

(11,000)

6,000 Inc.

Total

158,000

\)112,000

Liabilities and Stockholder’s equity

Account payable

\(20,000

\)15,000

5,000 Inc.

Common stock

100,000

80,000

20,000 Inc

Retained earnings

38,000

17,000

21,000 Inc.

Total

\(158,000

\)112,000

Net income of \(44,000 was reported, and dividends of \)23,000 were paid in 2017. New equipment was purchased and none was sold.

Instructions

Prepare a statement of cash flows for the year 2017.

P5-5 (L03) GROUPWORK (Balance Sheet Adjustment and Preparation) Presented below is the balance sheet of Sargent Corporation for the current year, 2017.

SARGENT CORPORATION

Balance Sheet

December 31, 2017

Current assets

\(485,000

Current liabilities

\)380,000

Investment

640,000

Long-term liabilities

1,000,000

Property, Plant, and Equipment

1,720,000

Stockholder’s equity

1,770,000

Intangible assets

305,000

\(3,150,000

\)3,150,000

The following information is presented.

1. The current assets section includes cash \(150,000, accounts receivable \)170,000 less \(10,000 for allowance for doubtful accounts, inventories \)180,000, and unearned rent revenue \(5,000. Inventory is stated on the lower-of-FIFO-cost-or-net realizable value.

2. The investments section includes the cash surrender value of a life insurance contract \)40,000; investments in common stock, short-term \(80,000 and long-term \)270,000; and bond sinking fund \(250,000. The cost and fair value of investments in common stock are the same.

3. Property, plant, and equipment includes buildings \)1,040,000 less accumulated depreciation \(360,000, equipment \)450,000 less accumulated depreciation \(180,000, land \)500,000, and land held for future use \(270,000.

4. Intangible assets include a franchise \)165,000, goodwill \(100,000, and discount on bonds payable \)40,000.

5. Current liabilities include accounts payable \(140,000, notes payable—short-term \)80,000 and long-term \(120,000, and income taxes payable \)40,000.

6. Long-term liabilities are composed solely of 7% bonds payable due 2025.

7. Stockholders’ equity has preferred stock, no par value, authorized 200,000 shares, issued 70,000 shares for \(450,000; and common stock, \)1.00 par value, authorized 400,000 shares, issued 100,000 shares at an average price of \(10. In addition, the corporation has retained earnings of \)320,000.

Instructions

Prepare a balance sheet in good form, adjusting the amounts in each balance sheet classification as affected by the information given above.
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