Chapter C, Problem 1TI

Identify each item as operating (O), investing (I), financing (F), or non-cash (N).

Cash receipt from the sale of equipment

To determine

Classify the given item as operating (O), investing (I), financing (F), or non-cash (N) activities.

Explanation of Solution

Statement of cash flows: Statement of cash flows 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.

 Following are three categories of cash flows shown on a statement of cash flows:

Operating activity: Operating activity refers to the cash received or cash paid in day-to-day operating activities of a company.  In this direct method, cash flow from operating activities is computed by using all cash receipts and cash payments during the year.

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 as salaries

For interest on loans

Income tax expenses and other operating expenses

Net cash provided from or used by operating activities

Table (1)

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.

Cash flows from investing activities

Add: Proceeds from collection of loan made to borrowers

Sale of marketable securities / investments

Sale of property, plant and equipment

Proceeds from discounting notes receivables

Deduct: Purchase of fixed assets/long-lived assets

Loan made by the company to others

Purchase of marketable securities

Net cash provided from or used by investing activities

Table (2)

Cash flows from financing activities: Financing activities refer to the activities carried out by a company to mobilize funds to carry out the business activities.   It includes raising cash from long-term debt or payment of long-term debt, which is used for business operations.

Cash flows from financing activities

Add: Issuance of common stock

Proceeds from borrowings by signing of a mortgage

Proceeds from sale of treasury stock

Proceeds from issuance of debt

Deduct: Payment of dividend

Repayment of debt

Interest paid

Redemption of debt

Purchase of treasury stock

Net cash provided from or used by financing activities

Table (3)

Non-cash investing and financing activities: The non-cash investing and financing activities that do not involve any cash dealings are known as non-cash transactions. In these type transactions, there will not be any inflow or outflow of cash. Simply put, the transaction, which does not have an impact on the inflow or outflow of cash, is called as non-cash transaction.

Examples of non-cash transactions are stated below:

• Issue of common stock to retire long-term debt.
• Purchase of land or building by signing mortgage notes payable.
• Purchase of land and building in exchange for notes payable.
• Purchase of machinery by issuing notes payable.
• Issuance of common stock for purchase of land.

Conclusion

Therefore, the cash receipt from sale of equipment is classified under investing (I) activities of statement of cash flows.