Question

The cash flow statement categorizes like transactions for optimal reporting. Identify each of the following transactions as one of the following:
• Operating activity (0) • Investing activity (I)
• Financing activity (F)
• Non-cash investing and financing activity (NIF)
• Transaction that is not reported on the statement of cash flows (N)
For each cash flow, indicate whether the item increases (+) or decreases (-) cash. The indirect method is used to report cash flows from operating activities.
a. Loss on sale of land. i. Cash sale of land.
b. Acquisition of equipment by issuance of note payable.
c. Issuance of long-term note payable to borrow cash.
d. Payment of long-term debt.
e. Depreciation.
f. Acquisition of building by issuance of common stock.
g. Purchase of treasury stock.
h. Increase in Salaries Payable.
i. Issuance of common stock.
j. Decrease in Merchandise Inventory.
k. Increase in Accounts Payable.
l. Increase in Prepaid Expenses.
m. Net income.
n. Decrease in Accrued Liabilities.
o. Payment of cash dividend.

Answer 1

Answer:

a. Operating activity (0) , decreases (-) and Investing activity (I), increases (+)

b. Non-cash investing and financing activity (NIF)

c. Financing activity (F), increases (+)

d. Financing activity (F), decreases (-)

e. Operating activity (0), increases (+)

f. Non-cash investing and financing activity (NIF)

g. Financing activity (F), decreases (-)

h. Operating activity (0), increases (+)

i. Financing activity (F), increases (+)

j. Operating activity (0), increases (+)

k. Operating activity (0), increases (+)

l. Operating activity (0), decreases (-)

m. Operating activity (0), increases (

n. Operating activity (0), decreases (-)

o. Financing activity (F), decreases (-)

Explanation:

The Indirect method reconciles the Operating profit to Operating Cash Flow by adjusting the Operating Profit with (1) Non Cash Items previously added or deducted from Operating Profit and (2) Changes in Working Capital items.

The Operating Activities - Shows cash flows resulting from ordinary course of trading

The Investing Activities - Shows cash flows resulting from sale or acquisition of items of Property, Plant and Equipment.

The Financing Activities - Shows Cash flows resulting from sources of funding and the repayment of debt capital.

Answer 2

The cash flow statement is the type of financial statement being used by the investors and managers who take various decisions for investment or for the budgeting of a new project.

It is prepared either by direct or indirect method.

The cash flow statement by the indirect method segregates the business activities into three categories:

• The operating activity: it records the net income incurred in the particular year and also the adjustments to the net income and changes in the working capital of the business.

• The financing activity: it records the changes in the financial position of the business such as due to dividend, common stock, and shares.

• The investing activity: it records the changes in the value of fixed assets of the company such as sale and purchase of land or building.

For each transaction, the cash flow activities will be affected as shown in the image attached below.

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