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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Classifying cash flows

Identify the type of cash flow activity for each of the following events (operating, investing, or financing):

  1. a. redeemed bonds
  2. b. Issued preferred stock
  3. c. Paid cash dividends
  4. d. Net income
  5. e. Sold equipment
  6. f. Purchased treasury stock
  7. g. Purchased patents
  8. h. Purchased buildings
  9. i. Sold long-term investments
  10. j. Issued bonds
  11. k. Issued common stock

To determine

Statement of cash flows: It is one of the financial statement that shows the cash and cash equivalents of a company for a particular period. It determines the net changes in cash through reporting the sources and uses of cash due to the operating, investing, and financing activities of a company.

Type of activities reported in statement of cash flows:

Indirect method: Under this method, the following amounts are to be adjusted from the Net Income to calculate the net cash provided from operating activities.

Cash flows from operating activities: These are the cash produced by the normal business operations.

The below table shows the way of calculation of cash flows from operating activities:

Cash flows from operating activities (Indirect method)
Add: Decrease in current assets
         Increase in current liability
         Depreciation expense and amortization expense
         Loss on sale of plant assets
Deduct: Increase in current assets
              Decrease in current liabilities
              Gain on sale of plant assets
Net cash provided from or used by operating activities

Table (1)

Cash flows from investing activities: Cash provided by or used in investing activities is a section of statement of cash flows. It includes the purchase or sale of equipment or land, or marketable securities, which is used for business operations.

The below table shows the way of calculation of cash flows from investing activities:

Cash flows from investing activities
Add: Proceeds from sale of fixed assets
         Sale of marketable securities / investments
Deduct: Purchase of fixed assets/long-lived assets
              Purchase of marketable securities
Net cash provided from or used by investing activities

Table (2)

Cash flows from financing activities: Cash provided by or used in financing activities is a section of statement of cash flows. It includes raising cash from long-term debt or payment of long-term debt, which is used for business operations.

The below table shows the way of calculation of cash flows from financing activities:

Cash flows from financing activities
Add: Issuance of common stock
          Proceeds from borrowings
          Proceeds from issuance of debt
          Issuance of bonds payable
Deduct: Payment of dividend
              Repayment of debt
              Redemption of debt
              Repurchase of stock
Net cash provided from or used by financing activities

Table (3)

To Identify: The type of given cash flow items as operating, investing, or financing activities.

Explanation

a.

The redeemed of bonds is a financing activity. Thus, it will be presented under the financing activity section as an outflow of cash.

b.

Issuance of preferred stock is a financing activity. Thus, it will be presented under the financing activity section as an inflow of cash.

c.

Paid cash for dividends is a financing activity. Thus, it will be presented under the financing activity section as an outflow of cash.

d.

Net income is an operating activity. Thus, it will be presented under the operating activity section as an inflow of cash.

e.

Sold equipment is an investing activity. Thus, it will be presented under the investing activity section as an inflow of cash.

f.

Purchased of treasury stock is a financing activity. Thus, it will be presented under the financing activity section as an outflow of cash...

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