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College Accounting, Chapters 1-27

23rd Edition
HEINTZ + 1 other
ISBN: 9781337794756

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Chapter
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BuyFindarrow_forward

College Accounting, Chapters 1-27

23rd Edition
HEINTZ + 1 other
ISBN: 9781337794756
Textbook Problem

SERIES B EXERCISE

CLASSIFYING BUSINESS TRANSACTIONS Bob Jacobs opened an advertising agency. The following transactions occurred during January of the current year. Classify each transaction as an operating, an investing, or a financing activity.

(a) Invested cash in the business, $5,000.

(b) Purchased office equipment. Paid $2,500 cash and agreed to pay the balance of $2,000 in four monthly installments.

(c) Paid office rent, $400.

(d) Received cash for services rendered, $700.

(e) Paid phone bill, $95.

(f) Received cash for services rendered, $600.

(g) Made payment on loan in transaction (b), $500.

(h) Paid wages to pan-time employee, $800.

(i) Paid electricity bill, $100.

(j) Withdrew cash for personal use, $500.

(k) Paid wages to pan-time employee, $600.

To determine

Classify each transaction as an operating, an investing or a financing activity.

Explanation

Classify each transaction as an operating, an investing or a financing activity.

Table (1)

Classification of activities in cash flow statement:

Statement of cash flows: This statement reports all the cash transactions which are responsible for inflow and outflow of cash, and result of these transactions is reported as ending balance of cash at the end of reported period. Statement of cash flows includes the changes in cash balance due to operating, investing, and financing activities.

Direct method: Under direct method, cash receipts from customers (cash inflows) and cash payments to suppliers (cash outflows) are reported under the operating activities.

Operating activities: Operating activities include cash inflows and outflows from business operations.

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

Cash flows from operating activities (Direct method)
 
Add: Cash receipts.
         Cash receipt from customer
         Dividend received
         Interest received
 
Less: Cash payments:
To supplier for acquisition of inventory
To employees
For interest on loans
Income tax expenses and other operating expenses
Net cash provided from or used by operating activities

Table (2)

Cash flows from investing activities: Investing activities refer to the activities carried out by a company for acquisition of long term assets.  It includes the purchase or sale of equipment or land, or marketable securities, which is used for business operations...

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