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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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Classification of Cash Flows

Patel Company reported the following items in its statement of cash flows presented using the indirect method.

a. Issuance of common stock

b. Cash paid for interest

c. Sold equipment for cash

d. Receipt of cash dividend on investment

e. Repayment of principal on long-term debt

f. Loss on disposal of equipment.

Required:

Indicate whether each item should be classified as a cash flow from operating activities, a cash flow from investing activities, a cash flow from financing activities.

Use the following information for Cornerstone Exercises 11-16 and 11-17:

A review of the balance sheet of Peterson Inc. revealed the following changes in the account balances:

a. Increase in long-term investment

b Increase in accounts receivable

c. Increase in common stock

d. Increase in long-term debt

e. Decrease in accounts payable

f. Decrease in supplies inventory

g. Increase in prepaid insurance

h. Decrease in retained earnings

To determine

Introduction:

A cash flow statement normally breaks out an organization’s cash sources and uses for the period into three classifications: cash flow from operating activities, cash flow from investing activities, and cash flow from financing exercises.

To discuss:

Indicate whether each item should be classified as a cash flow from operating activity, a cash flow from investing activities, or a cash flow from financing activity.

Explanation

The following item should mention under the cash flow of the indirect method

Particular Head in the cash flow
Issuance of common stock Add: Financing activity Issuance of common stock related to distribution of share and taking the cash against issue of share.
Cash paid for interest Add: Operating head (non-operating item)

Less: under the financial activity head

Cash paid to interest means interest paid on the borrowing and this is outflow and considered in the financing
Sold equipment for cash Add: investing activity Sold equipment means decrease in fixed asset and release cash and considered in investing activity...

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