ACC 206 Week Assignment<\/p>\n
Name<\/p>\n
Institution <\/p>\n
Date <\/p>\n
Critical Thinking Question: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? <\/p>\n
Cash Flow statement represents the comprehensive statement that outlines the sources of cash funds and their application for an entity over a given accounting period. It is therefore an analytical tool that determines the liquidity position of a firm\/entity. Its preparation is founded on the international accounting standards (IAS) 7. Cash flow statements provide a detailed analysis of the financial and non-financial transactions reported in the operations of an entity over a specified period of time. Both cash and non-cash transactions are included in the cash flow statements. The inclusion of the non-cash transactions is founded on the \u201ccash and cash equivalents\u201d principle of the cash flow statement. According to this principle, non-cash transactions that are highly liquid and convertible to known monetary amounts of cash are accorded the same accounting treatment as other cash transactions, hence their inclusion in the cash flow statements. Some non-cash transactions are included in the cash flow statement in the account that they constitute investing or financing activities that are not directly related to the firm\u2019s operating activities. Non-cash transactions mainly fall under this category of financing or investing activities that have no effect on the firm\u2019s cash outlay or inflows. However, these transactions involves long-term resources and owner\u2019s equity, hence the justification for their inclusion in the cash flow statements. IAS (7) and the General Accepted Accounting Principles (GAAP) outlines the disclosure principle for these non-cash financing and investing activities. The two principles state that non-cash transactions should be disclosed in footnotes of the financial statements for the same accounting period. In most occasions, these financing and investing activities are disclosed in a separate schedule to enhance accountability during the preparation of financial statements. <\/p>\n
Classification of activitiesClassify each of the following transactions as arising from an operating (O), investing (I), financing (F), or noncash investing\/financing (N) activity. <\/p>\n
________ Received $80,000 from the sale of land \u2013 Investing Activity <\/p>\n
________ Received $3,200 from cash sales \u2013 Operating Activity <\/p>\n
________ Paid a $5,000 dividend \u2013 Financing Activity <\/p>\n
________ Purchased $8,800 of merchandise for cash \u2013 Investing Activity <\/p>\n
________ Received $100,000 from the issuance of common stock \u2013 Financing Activity <\/p>\n
________ Paid $1,200 of interest on a note payable \u2013 Financing Activity <\/p>\n
________ Acquired a new laser printer by paying $650 \u2013 Investing Activity <\/p>\n
________ Acquired a $400,000 building by signing a $400,000 mortgage note Non-cash Investing Activity <\/p>\n
Overview of direct and indirect methods <\/p>\n
Evaluate the comments that follow as being True or False. If the comment is false, briefly explain why.<\/p>\n
Both the direct and indirect methods will produce the same cash flow from operating activities – False. This because direct method is not adjusted for other cash flow items including depreciation and exchange loss. <\/p>\n
Depreciation expense is added back to net income when the indirect method is used – True. <\/p>\n
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 – True. <\/p>\n
The cash paid to suppliers is normally disclosed on the statement of cash flows when the indirect method of statement preparation is employed – True. <\/p>\n
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 \u2013 False; exchange losses adjustment are common with indirect method rather direct method. <\/p>\n
Equipment transaction and cash flow reporting <\/p>\n
Dec. 31, 20X4 Dec. 31, 20X3 <\/p>\n
Property, Plant & Equipment:<\/p>\n
Land $94,000 $94,000 <\/p>\n
Equipment 652,000 527,000<\/p>\n
Less: Accumulated depreciation -316,000 -341,000<\/p>\n
New equipment purchased during 20×4 totaled $280,000. The 20×4 income statement disclosed equipment depreciation expense of $41,000 and a $9,000 loss on the sale of equipment.<\/p>\n
Determine the cost and accumulated depreciation of the equipment sold during 20X4. <\/p>\n
Determine the selling price of the equipment sold. <\/p>\n
Show how the sale of equipment would appear on a statement of cash flows prepared by using the indirect method. <\/p>\n
Workings<\/p>\n
DR. Equipment Account As at 31st Dec. 2004 CR.<\/p>\n
Bal. b\/d 527,000<\/p>\n
Purchases\/Cash 280,000<\/p>\n
Acc. Depreciation (2003) 341,000 Provision for Dep. (2004) 316,000<\/p>\n
Sales\/Cash 180,000<\/p>\n
Bal. c\/d 652,000<\/p>\n
$1,148,000 $1,148,000<\/p>\n
Disposal A\/C<\/p>\n
DR. As at 31st Dec. 2004 CR.<\/p>\n
Equipment 180,000<\/p>\n
Acc. Depreciation 41,000<\/p>\n
Proceed from Sales 130,000<\/p>\n
Loss on Disposal 9,000<\/p>\n
$180,000 $180,000<\/p>\n
Cost of the Equipment = $180,000<\/p>\n
Accumulated Depreciation = $41,000<\/p>\n
Selling Price = $130,000<\/p>\n
Sample Cash Flow Statement<\/p>\n
Cash Flow from Operating Activities<\/p>\n
Net Profit before Tax xxxx<\/p>\n
Adjusted for: <\/p>\n
Depreciation $41,000<\/p>\n
Loss on disposal of Equipment $9,000$50,000<\/p>\n
Cash Flow from Investing Activities <\/p>\n
Purchase of Equipment (280,000)<\/p>\n
Proceeds from Disposal of Equipment 130,000<\/p>\n
Cash flow information: Direct and indirect methods The comparative year-end balance sheets of Sign Graphics, Inc., revealed the following activity in the company’s current accounts:<\/p>\n
20X5 20X4 Increase \/ Decrease) <\/p>\n
Current assets Cash $55,400 $35,200 $20,200<\/p>\n
Accounts receivable (net) 83,800 88,000 -4,200<\/p>\n
Inventory 243,400 233,800 9,600<\/p>\n
Prepaid expenses 25,400 24,200 1,200<\/p>\n
Current liabilities Accounts payable $123,600 $140,600 ($17,000)<\/p>\n
Taxes payable 43,600 49,200 -5,600<\/p>\n
Interest payable 9,000 6,400 2,600<\/p>\n
Accrued liabilities 38,800 60,400 -21,600<\/p>\n
Note payable 44,000 \u2014 44,000<\/p>\n
The accounts payable were for the purchase of merchandise. Prepaid expenses and accrued liabilities relate to the firm’s selling and administrative expenses. The company’s condensed income statement follows.<\/p>\n
SIGN GRAPHICS INC.<\/p>\n
Income Statement<\/p>\n
for the Year Ended December 31, 20×5<\/p>\n
\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0<\/p>\n
Sales $713,800 \u00a0<\/p>\n
Less: Cost of goods sold 323,000 \u00a0<\/p>\n
Gross profit $390,800 \u00a0<\/p>\n
\u00a0 \u00a0<\/p>\n
Less: Selling & administrative expenses $186,000 \u00a0<\/p>\n
Depreciation expense 17,000 \u00a0<\/p>\n
Interest expense 27,000 230,000 \u00a0<\/p>\n
\u00a0 \u00a0<\/p>\n
Add: gain on sale of land $160,800 \u00a0<\/p>\n
\u00a0 21,800 \u00a0<\/p>\n
Income before taxes $182,600 \u00a0<\/p>\n
Income taxes 36,800 \u00a0<\/p>\n
Net income $145,800 \u00a0<\/p>\n
\u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0 \u00a0<\/p>\n
Other data: <\/p>\n
Long-term investments were purchased for cash at a cost of $74,600. <\/p>\n
Cash proceeds from the sale of land totaled $76,200. <\/p>\n
Store equipment of $44,000 was purchased by signing a short-term note payable. Also, a $150,000 telecommunications system was acquired by issuing 3,000 shares of preferred stock. <\/p>\n
A long-term note of $49,400 was repaid. <\/p>\n
Twenty thousand shares of common stock were issued at $5.19 per share. <\/p>\n
The company paid cash dividends amounting to $128,600. <\/p>\n
Instructions: <\/p>\n
Prepare the operating activities section of the company’s statement of cash flows, assuming use of: <\/p>\n
The direct method. <\/p>\n
The indirect method. <\/p>\n
Prepare the investing and financing activities sections of the statement of cash flows.<\/p>\n
Sign Graphics, Inc.<\/p>\n
Cash Flow Statement<\/p>\n
As at 31st Dec., 2005<\/p>\n
Cash Flow from Operating Activities <\/p>\n
Cash Receipts from customers $713,800<\/p>\n
Cash paid to suppliers ($323,000)<\/p>\n
Cash Generated from Operations $390,800<\/p>\n
Interest Paid (27,000)<\/p>\n
Income Tax Paid (36,800)<\/p>\n
Depreciation Expense (17,000)<\/p>\n
Net Cash Flow from Operating Activities $310,000<\/p>\n
Indirect Method <\/p>\n
Sign Graphics, Inc.<\/p>\n
Cash Flow Statement<\/p>\n
As at 31st Dec., 2005<\/p>\n
Cash Flow from Operating Activities <\/p>\n
Net Profit before Tax $182,600<\/p>\n
Adjusted for: <\/p>\n
Depreciation expense 17,000<\/p>\n
Gain on Sale of Land (21,800)<\/p>\n
Interest Expense 27,00022,200<\/p>\n
Operating Profit before changes in Working Capital 204,800<\/p>\n
Increase in Cash (20,000)<\/p>\n
Increase in Account Receivable (4,200)<\/p>\n
Increase in Inventory (9,600)<\/p>\n
Increase in Prepaid Exp (1,200)<\/p>\n
Decrease in A\/c Payables (17,000)<\/p>\n
Tax Payable decrease (5,600)<\/p>\n
Increase in Interest Payable 2,600<\/p>\n
Accrued liability (21,600)<\/p>\n
Increase in Notes Payable 44,000(32,000)<\/p>\n
Cash Generated from Operating Activities 172,200<\/p>\n","protected":false},"excerpt":{"rendered":"
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