Cash Flows

Topics: Generally Accepted Accounting Principles, Cash flow statement, Expense Pages: 8 (958 words) Published: September 9, 2014


Cash Flows
Aleshia Wisch
ACC206: Principles of Accounting II
Prof. Eric Sumners
August 11, 2014
ACC 206 Week Assignment

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? It is important for a company to show what assets they have on hand that can convert to cash. Non cash transactions are disclosed in the footnotes of the financial statement of cash flows. “…a company may exchange common stock for land. Such transactions do not trigger a direct inflow or outflow of cash, but they are nonetheless highly significant investing/financing events” (Bridgepoint Education, 2012, Sec. 1.1). Essentially, it shows what the company is trading through investments and financial exchanges.

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

b. __ O_____ Received $3,200 from cash sales.
c. ___F_____ Paid a $5,000 dividend.
d. ___O_____ Purchased $8,800 of merchandise for cash.
e. ___F_____ Received $100,000 from the issuance of common stock. f. ___F/O_____ Paid $1,200 of interest on a note payable. – When using the indirect method we add this back to the Net Income. g. ___I_____ Acquired a new laser printer by paying $650.

h. ___N_____ 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. True

b. Depreciation expense is added back to net income when the indirect method is used. True
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. False – The only differences between using the direct method and indirect method are located in the operating activities. The investing or financing sections are done the same way, regardless of which method is used to calculate the operating section. d. The cash paid to suppliers is normally disclosed on the statement of cash flows when the indirect method of statement preparation is employed. False – Cash paid to suppliers is disclosed on the statement of cash flows only when the direct method of statement preparation is used. 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. True

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 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.
Beginning balance$527,000
Add: New Equipment 280,000
Less: Cost of Equipment 155,000(807,000 – 652,000)
Ending balance$652,000
A1) Cost of Equipment was $155,000.

Accumulated Depreciation:
Beginning balance$341,000
Plus: Depreciation for 1 year 41,000
Less: Accumulated depreciation 66,000(382,000 – 316,000)
Ending balance -$316,000
A2) Accumulated depreciation of equipment sold was $66,000.

Cost of Equipment Sold$155,000
Less: Accumulated Depreciation 66,000
Equals: Book Value of Equipment 89,000
Less: Proceeds from sale 80,000(155,000 – 66,000 – 9,000) Loss on sale of equipment 9,000
b.) Sale proceeds from the sale were $80,000....


References: N. A. (2013). Cash Flow from Operating Activities: Direct Method. Retrieved from www.accountingexplained.com
N. A. (2013). Cash Flow from Operating Activities Indirect Method. Retrieved from www.accountingexplained.com
Principles of Accounting: Volume II (2012). San Diego, CA: Bridgepoint Education.
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