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Chapter 23: Q1BE (page 1372)

Novak Corporation is preparing its 2017 statement of cash flows, using the indirect method. Presented below is a list of items that may affect the statement. Using the code below, indicate how each item will affect Novak’s 2017 statement of cash flows.

Code Letter Effect

A Added to net income in the operating section

D Deducted from net income in the operating section

R-I Cash receipt in investing section

P-I Cash payment in investing section

R-F Cash receipt in financing section

P-F Cash payment in financing section

N Noncash investing and financing activity

(a)Purchase of land and building

(b)Decrease in accounts receivable

(c)Issuance of stock.

(d)Depreciation expense.

(e)Sale of land at book value.

(f)Sale of land at a gain.

(g)Payment of dividends.

(h)Increase in accounts receivable.

(i)Purchase of available-for-sale debt investment

(j)Increase in accounts payable.

(k)Decrease in accounts payable.

(l)Loan from bank by signing note

(m)Purchase of equipment using a note

(n)Increase in inventory

(o)Issuance of bonds.

(p)Redemption of bonds payable.

(q)Sale of equipment at a loss.

(r)Purchase of treasury stock.

Short Answer

Expert verified

A cash flow statement separates the transactions according to their nature, such that if a transaction is related to the main production, then it is under operation, and if the transaction is related to finance, then it is under financing activity.

Step by step solution

01

Meaning of Cash Flow Statement

It is one of the reporting methods of cash transactions in a separate statement that records only business transactions where the monetary term is included. It helps to determine the flow of cash in the business.

02

Indication of the below transactions

Items

Code

Effect

Purchase of land and building

P-I

Cash payment in investing section.

Decrease in accounts receivable

A

Added to net income in the operating section.

Issuance of stock.

R-F

Cash receipt in financing section.

Depreciation expense

A

Added to net income in the operating section.

Sale of land at book value

R-I

Cash receipt in investing section.

Sale of land at a gain.

R-I

D

Cash receipt in investing section.

Deducted from net income in the operating section

Payment of dividends.

P-F

Cash payment in financing section.

Increase in accounts receivable.

D

Deducted from net income in the operating section.

Purchase of available-for-sale debt investment

P-I

Cash payment in investing section.

Increase in accounts payable.

A

Added to net income in the operating section.

Decrease in accounts payable

D

Deducted from net income in the operating section.

Loan from bank by signing note

R-F

Cash receipt in financing section.

Purchase of equipment using a note

N

Non-cash investing and financing activity.

Increase in inventory

D

Deducted from net income in the operating section.

Issuance of bonds.

R-F

Cash receipt in financing section.

Redemption of bonds payable.

P-F

Cash payment in financing section.

Sale of equipment at a loss.

R-I

A

Cash receipt in investing section.

Added to net income in the operating section.

Purchase of treasury stock.

P-F

Cash payment in financing section.

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Most popular questions from this chapter

Question: CA23-5 (Purpose and Elements of SCF) GAAP requires the statement of cash flows be presented when financial statements are prepared.

Instructions

(a) Explain the purposes of the statement of cash flows.

(b) List and describe the three categories of activities that must be reported in the statement of cash flows.

(c) Identify and describe the two methods that are allowed for reporting cash flows from operations.

(d) Describe the financial statement presentation of noncash investing and financing transactions. Include in your description an example of a noncash investing and financing transaction.

Founded in the early 1980s, the Vermont Teddy Bear Co. designs and manufactures American-made teddy bears and markets them primarily as gifts called Bear-Grams or Teddy Bear-Grams. Bear-Grams are personalized teddy bears delivered directly to the recipient for special occasions such as birthdays and anniversaries. The Shelburne, Vermont, company’s primary markets are New York, Boston, and Chicago. Sales have jumped dramatically in recent years. Such dramatic growth has significant implications for cash flows. Provided below are the cash flow statements for two recent years for the company.

Current Year

Prior Year

Cash flows from operating activities:

Net income

\( 17,523

\) 838,955

Adjustments to reconcile net income to net cash provided by operating activities

Deferred income taxes

(69,524)

(146,590)

Depreciation and amortization

316,416

181,348

Changes in assets and liabilities:

Accounts receivable, trade

(38,267)

(25,947)

Inventories

(1,599,014)

(1,289,293)

Prepaid and other current assets

(444,794)

(113,205)

Deposits and other assets

(24,240)

(83,044)

Accounts payable

2,017,059

(284,567)

Accrued expenses

61,321

170,755

Accrued interest payable, debentures

-

(58,219)

Other

-

(8,960)

Income taxes payable

-

117,810

Net cash provided by (used for) operating activities

236,480

(700,957)

Net cash used for investing activities

(2,102,892)

(4,422,953)

Net cash (used for) provided by financing activities

(315,353)

9,685,435

Net change in cash and cash equivalents

(2,181,765)

4,561,525

Other information:

Current liabilities

\( 4,055,465

\) 1,995,600

Total liabilities

4,620,085

2,184,386

Net sales

20,560,566

17,025,856

Instructions

  1. Note that net income in the current year was only \(17,523 compared to prior-year income of \)838,955, but net cash flow from operating activities was \(236,480 in the current year and a negative \)700,957 in the prior year. Explain the causes of this apparent paradox.
  2. Evaluate Vermont Teddy Bear’s liquidity, solvency, and profitability for the current year using cash flow-based ratios.

The balance sheet data of Brown Company at the end of 2017 and 2016 follow.

2017 2016

Cash \( 30,000 \) 35,000

Accounts receivable (net) 55,000 45,000

Inventory 65,000 45,000

Prepaid expenses 15,000 25,000

Equipment 90,000 75,000

Accumulated depreciation—equipment (18,000) (8,000)

Land 70,000 40,000

\(307,000 \)257,000

Accounts payable \( 65,000 \) 52,000

Accrued expenses 15,000 18,000

Notes payable—bank, long-term –0– 23,000

Bonds payable 30,000 – 0–

Common stock, \(10 par 189,000 159,000

Retained earnings 8,000 5,000

\)307,000 \(257,000

Land was acquired for \)30,000 in exchange for common stock, par \(30,000, during the year; all equipment purchased was for cash. Equipment costing \)10,000 was sold for \(3,000; book value of the equipment was \)6,000. Cash dividends of $10,000 were declared and paid during the year.

Instructions

Compute net cash provided (used) by:

(a) Operating activities.

(b) Investing activities.

(c) Financing activities.

Colbert Corporation had the following 2017 income statement.

Revenues \(100,000

Expenses 60,000

\) 40,000

In 2017, Colbert had the following activity in selected accounts.

Accounts Receivable Doubtful Accounts 1/1/17 20,000 1,200 1/1/17 Revenues 100,000 1,000 Write-offs Write-offs 1,000 1,840 Bad debt expense 90,000 Collections 12/31/17 29,000 2,040 12/31/17

Prepare Colbert’s cash flows from the operating activities section of the statement of cash flows using

(a) the direct method and

(b) the indirect method.

(Computation of Operating Activities—Direct Method) Presented below are two independent situations.

Situation A: Annie Lennox Co. reports revenues of \(200,000 and operating expenses of \)110,000 in its first year of operations, 2017. Accounts receivable and accounts payable at year-end were \(71,000 and \)29,000, respectively. Assume that the accounts payable related to operating expenses. (Ignore income taxes.)

Instructions

Using the direct method, compute net cash provided by operating activities.

Situation B: The income statement for Blues Traveler Company shows cost of goods sold \(310,000 and operating expenses (exclusive of depreciation) \)230,000. The comparative balance sheet for the year shows that inventory increased \(26,000, prepaid expenses decreased \)8,000, accounts payable (related to merchandise) decreased \(17,000, and accrued expenses payable increased \)11,000.

Instructions

Compute (a) cash payments to suppliers and (b) cash payments for operating expenses.
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