Why are noncash transactions, such as the exchange of common stock for a building for example, included on a statement of cash flows? How are these noncash transactions disclosed?
complete the following 5 exercises below in either Excel or a word document (but must be single document). You must show your work where appropriate (leaving the calculations within Excel cells is acceptable). Save the document, and submit it in the appropriate week using the Assignment Submission button.
1. Critical Thinking Question:
Answer the following questions:
Why are noncash transactions, such as the exchange of common stock for a building for example, included on a statement of cash flows? How are these noncash transactions disclosed?
2. 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.
3. 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 and indirect methods 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.
4. Equipment transaction and cash flow reporting
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 20×4 totaled $280,000. The 20×4 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.
5. 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
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, 20×5
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
Other data:
1. Long-term investments were purchased for cash at a cost of $74,600.
2. Cash proceeds from the sale of land totaled $76,200.
3. 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.
4. A long-term note of $49,400 was repaid.
5. Twenty thousand shares of common stock were issued at $5.19 per share.
6. The company paid cash dividends amounting to $128,600.
Instructions:
a. Prepare the operating activities section of the company’s statement of cash flows, assuming use of:
1. The direct method.
2. The indirect method.
b. Prepare the investing and financing activities sections of the statement of cash flows.
Your name:
1. Critical thinking question
2. Classification of activities: (O, I, F or N)
a.
b.
c.
d.
e.
f.
g.
h.
c. Overview of direct and indirect methods: (True or False)
a.
b.
c.
d.
e.
4. Equipment transaction and cash flow reporting
We can figure out the unknows by filling in what we do know, and then calculating
what is needed to make debits equal credits.
a. Debits Credits
Beginning equipment Sales during year
Additions during year Ending balance
Total debits Total credits
0 0
Debits Credits
Removals during year Beginning depreciation
Ending depreciation Additions during year
Total debits Total credits
0 0
Cost of disposal: –
Cost of equipment sold = cost of disposal + loss on sale
Accumulated depreciation on disposal: –
b. Selling price of equipment:
Cost of equipment sold –
Less: Accumulated depreciation on equipment sold –
Book value –
Subtract: Loss on sale
Cash proceeds from selling equipment –
c. Show impact of this sale on the cash flow statement using the indirect method:
Cash flows from operating activities
Net income $XXX (not provided in problem)
Add: Loss on sale of equipment
Cash flows from investing activities
Proceeds from disposal of equipment
5. Cash flow information: Direct and indirect methods
a1. Operating activities section using the direct method:
Cash flows from operating activities
Cash received from customers
Less cash payments for:
Purchases of merchandise
Selling & administrative expenses
Interest
Income taxes –
Net cash provided by operating activities –
a2. Operating activities section using the indirect method:
Cash flows from operating activities
Net income
Add (deduct) items to convert net income to a cash basis
Depreciation expense
Gain on sale of land
Decrease in accounts receivable (net)
Increase in inventory
Increase in prepaid expenses
Decrease in accounts payable
Decrease in taxes payable
Increase in interest payable
Decrease in accrued liabilities –
Net cash provided by operating activities –
b.
Cash flows from investing activities
Purchase of long-term investments
Proceeds from sale of land
Net cash provided by investing act. –
Cash flows from financing activities
Repayment of long-term note
Issuance of common stock
Dividends paid
Net cash used by financing activities –
