Cash paid for merchandise is an operating activity

Exercises

1. Classification of activities

Classify each of the following transactions as arising from an operating (O), investing (I), financing (F), or noncash investing/financing (N) activity:

________

a. Received $80,000 from the sale of land

________

b. Received $3,200 from cash sales

________

c. Paid a $5,000 dividend

________

d. Purchased $8,800 of merchandise for cash

________

e. Received $100,000 from the issuance of common stock

________

f. Paid $1,200 of interest on a note payable

________

g. Acquired a new laser printer by paying $650

________

h. Acquired a $400,000 building by signing a $400,000 mortgage note

2. Indirect calculation of operating cash flows

Video Corporation's balance sheet revealed the following account balance information:

Account

Dec. 31, 20X6

Dec. 31, 20X5

Accounts receivable

$52,000

$57,000

Merchandise inventory

75,000

68,000

Accounts payable

21,000

19,500

The accrual-basis net income was $107,000. In computing net income, the company recorded $12,600 of depreciation expense; there were no gains or losses from investing and financing activities.

On the basis of the preceding information, calculate Video's cash flows from operating activities by using the indirect method.

3. Indirect calculation of operating cash flows

Specialty Services Inc. reported a net income of $110,000 for the year just ended, which includes an $18,000 gain on the sale of long-term investments. The following data were obtained from comparative balance sheets:

Oct. 31, 20X2

Oct. 31, 20X1

Trade accounts receivable

$245,000

$203,000

Merchandise inventory

230,000

308,000

Accumulated depreciation: equipment

120,000

65,000

Accounts payable

190,000

124,000

Accrued liabilities

38,000

73,000

There were no purchases or disposals of equipment during the year. The long-term investment had a carrying (book) value of $77,000 and was sold for cash on June 15.

On the basis of the preceding information, determine the cash provided by operating activities from November 1, 20X1 through October 31, 20X2. The firm uses the indirect method of statement preparation.

4. Overview of direct and indirect methods

Evaluate the comments that follow as being true or false. If the comment is false, briefly explain why.

a. Both the direct method and the indirect method will produce the same cash flow from operating activities.

b. Depreciation expense is added back to net income when the indirect method is used.

c. One of the advantages of using the direct method rather than the indirect method is that larger cash flows from financing activities will be reported.

d. The cash paid to suppliers is normally disclosed on the statement of cash flows when the indirect method of statement preparation is employed.

e. The dollar change in the Merchandise Inventory account appears on the statement of cash flows only when the direct method of statement preparation is used.

5. Statement preparation: Direct method

The comparative balance sheets of Village Company follow:

VILLAGE COMPANY Comparative Balance Sheets December 31, 20X2 and 20X1

Dec. 31, 20X2

Dec. 31, 20X1

Cash

$ 5,000

$ 7,000

Accounts receivable (net)

12,000

18,000

Merchandise inventory

35,000

28,000

Property, plant, & equipment

40,000

30,000

Less: Accumulated depreciation

(17,000)

(10,000)

Total assets

$ 75,000

$ 73,000

Accounts payable*

$ 25,000

$ 21,000

Income taxes payable

4,000

1,000

Common stock

24,000

24,000

Retained earnings

22,000

27,000

Total liabilities & stock, equity

$ 75,000

$ 73,000

*Relate to purchases of merchandise

The firm's accrual-basis income statement revealed the following data: sales, $120,000; cost of goods sold, $80,000; selling and administrative expenses, $25,000; depreciation expense, $7,000; and income taxes, $3,000. (There was no interest expense.) Dividends declared and paid during 20X2 totaled $10,000. Finally, Village purchased $10,000 of equipment for cash on August 14.

a. Determine the increase or decrease in cash during 20X2.

b. Prepare a statement of cash flows by using the direct method.

6. Equipment transaction and cash flow reporting

The property, plant, and equipment section of ProComp Inc.'s comparative balance sheet follows:

Dec. 31, 20X4

Dec. 31, 20X3

Property, plant, & equipment

Land

$ 94,000

$ 94,000

Equipment

652,000

527,000

Less: Accumulated depreciation

(316,000)

(341,000)

New equipment purchased during 20X4 totaled $280,000. The 20X4 income statement disclosed equipment depreciation expense of $41,000 and a $9,000 loss on the sale of equipment.

a. Determine the cost and accumulated depreciation of the equipment sold during 20X4.

b. Determine the selling price of the equipment sold.

c. Show how the sale of equipment would appear on a statement of cash flows prepared by using the indirect method.

7. Evaluation of cash flows

The following statement of cash flows was prepared for Yellowstone Company:

YELLOWSTONE COMPANY Statement of Cash Flows for the Year Ended December 31, 20X2

Cash flows from operating activities

Cash received from customers

$240,000

Less cash payments for:

Purchases of merchandise

$180,000

Selling & administrative expenses

75,000

Interest

20,000

275,000

Net cash used by operating activities

$ (35,000)

Cash flows from investing activities

Sale of equipment

$ 20,000

Sale of vehicles

10,000

Sale of long-term investments

40,000

Net cash provided by investing act

70,000

Cash flows from financing activities

Retirement of long-term debt

(50,000)

Net increase (decrease) in cash

$ (15,000)

Cash balance, January 1, 20X2

54,000

Cash balance, December 31, 20X2

$ 39,000

Evaluate the nature of the decrease in cash. Does your analysis indicate any potential problems for Yellowstone?

Problems

1. Transaction analysis: Operating, investing, and financing activities The management of Maui Corporation desires to know the nature of each of the following transactions and events:

1. Collected cash from customers for cash sales.

2. Purchased a short-term investment for cash.

3. Secured a mortgage note to finance the acquisition of a building.

4. Issued 10-year bonds for cash.

5. Paid a short-term nonoperating note.

6. Sold equipment having a book value of $30,000 for $30,000 cash.

7. Sold a parcel of land at cost; received a long-term note.

8. Received dividends on a long-term stock investment.

9. Paid income taxes.

10. Issued preferred stock in exchange for a valuable patent.

11. Reacquired treasury stock for cash.

12. Paid previously declared cash dividends.

Instructions

a. Briefly explain the difference between investing and financing activities and noncash investing/financing activities.

a. Design a table with the following columnar headings: operating activity, investing activity, financing activity, and noncash investing/financing activity. Classify the 12 transactions listed by using these headings. For all classifications except noncash investing/financing, indicate whether the transaction causes a cash inflow (+) or a cash outflow (−).

1. Operating activities: Direct and indirect methods The 20X5 income statement of Office Products Inc. follows:

OFFICE PRODUCTS INC. Income Statement for the Year Ended December 31, 20X5

Net sales

$980,000

Cost of goods sold

Beginning inventory

$235,000

Net purchases

720,000

Goods available for sale

$955,000

Less: Ending inventory

260,000

Cost of goods sold

695,000

Gross profit

$285,000

Expenses

Selling & administrative

$149,000

Depreciation

54,000

203,000

$ 82,000

Other revenue (expense)

Interest expense

$ (18,000)

Gain on sale of equipment

26,000

8,000

Income before income taxes

$ 90,000

Income taxes

27,000

Net income

$ 63,000

1. The following additional information was obtained from the general ledger and management personnel:

3. Accounts payable related to the purchases of merchandise decreased during 20X5 by $32,800. In contrast, accounts receivable increased by $23,700.

3. Prepaid expenses and wages payable increased throughout 20X5 by $2,400 and $5,600, respectively.

3. The balance in the income taxes payable account on January 1 was $4,900; the December 31 balance was $4,100.

3. The company financed a $78,000 equipment purchase by signing a note payable that is due in 20X8.

Instructions

c. Prepare the operating activities section of the statement of cash flows by using the direct method.

c. Prepare the operating activities section of the statement of cash flows by using the indirect method.

1. Cash flow information: Direct and indirect methods The comparative year-end balance sheets of Sign Graphics Inc. revealed the following activity in the company's current accounts:

20X5

20X4

Increase (decrease)

Current assets

Cash

$ 55,400

$ 35,200

$ 20,200

Accounts receivable (net)

83,800

88,000

(4,200)

Inventory

243,400

233,800

9,600

Prepaid expenses

25,400

24,200

1,200

Current liabilities

Accounts payable

$ 123,600

$140,600

$(17,000)

Taxes payable

43,600

49,200

(5,600)

Interest payable

9,000

6,400

2,600

Accrued liabilities

38,800

60,400

(21,600)

Note payable

44,000

—

44,000

1. The accounts payable were for the purchase of merchandise. Prepaid expenses and accrued liabilities relate to the firm's selling and administrative expenses. The company's condensed income statement follows:

SIGN GRAPHICS INC. Income Statement for the Year Ended December 31, 20X5

Sales

$713,800

Less: Cost of goods sold

323,000

Gross profit

$390,800

Less: Selling & administrative expenses

$186,000

Depreciation expense

17,000

Interest expense

27,000

230,000

Add: Gain on sale of land

$160,800

21,800

Income before taxes

$182,600

Income taxes

36,800

Net income

$145,800

1. Other data:

6. Long-term investments were purchased for cash at a cost of $74,600.

6. Cash proceeds from the sale of land totaled $76,200.

6. Store equipment of $44,000 was purchased by signing a short-term note payable. Also, a $150,000 telecommunications system was acquired by issuing 3,000 shares of preferred stock.

6. A long-term note of $49,400 was repaid.

6. Twenty thousand shares of common stock were issued at $5.19 per share.

6. The company paid cash dividends amounting to $128,600.

Instructions

f. Prepare the operating activities section of the company's statement of cash flows, assuming use of 1) the direct method. 2) the indirect method.

f. Prepare the investing and financing activities sections of the statement of cash flows.