1.

Critical Thinking Question:

Answer the following questions:
Why are noncash transactions, such as the exchange of common stock a building, included
on a statement of cash flows? ow are these noncash transactions disclosed?
The Financial Accounting Standards Board added the Non-Cash element to reveal the total
investing and financing function to the Cash Flow Statement. This will highlight ke com!an
functions such as issuing share in e"change for assets# e"changing non-cash assets or lia$ilities
for other non-cash assets or lia$ilities and retiring de$t with assets. %hile not directl causing an
inflow or outflow of cash# these transactions are im!ortant to investors or !otential financers.
Noncash transactions are disclosed in a se!arate schedule at the $ottom of the statement of cash
flows.
&. Classification of acti!ities
Classif each of the following transactions as arising from an o!erating '()# investing '*)#
financing 'F)# or noncash investing+financing 'N) activit.
a. ,,,*,,,,, -eceived ./0#000 from the sale of land.
$. ,,,(,,,,, -eceived .1#&00 from cash sales.
c. ,,,F,,,,, 2aid a .3#000 dividend.
d. ,,,(,,,,, 2urchased ./#/00 of merchandise for cash.
e. ,,,F,,,,, -eceived .400#000 from the issuance of common stock.
f. ,,,,(,,,, 2aid .4#&00 of interest on a note !aa$le.
g. ,,,,*,,,, Acquired a new laser !rinter $ !aing .530.
h. ,,,N,,,,, Acquired a .600#000 $uilding $ signing a .600#000 mortgage note.
1. "!er!iew of direct and indirect methods
7valuate the comments that follow as $eing True or False. *f the comment is false# $riefl
e"!lain wh.
a. #oth the direct and indirect methods will $roduce the same cash flow from
o$erating acti!ities.
True
b. %e$reciation ex$ense is added back to net income when the indirect method is used.
True
c. "ne of the ad!antages of using the direct method rather than the indirect method is
that larger cash flows from financing acti!ities will be re$orted.
False# $oth the direct and indirect method will re!ort the investing and financing activities the
same.
d. The cash $aid to su$$liers is normally disclosed on the statement of cash flows when
the indirect method of statement $re$aration is em$loyed.
False# the indirect method does not re!ort individual items of cash inflows and cash outflows
from o!erating activities.
e. The dollar change in the &erchandise 'n!entory account a$$ears on the statement
of cash flows only when the direct method of statement $re$aration is used.
False# a dollar change in 8erchandise *nventor would a!!ear as an ad9ustment to reduce net
income# which means that it would reduce cash flows and a!!ear on the Cash Flow Statement.
6. ()ui$ment transaction and cash flow re$orting
%ec. *1, +,-. %ec. *1, +,-*
:and .;6#000 .;6#000
7qui!ment 53&#000 3&<#000
:ess: Accumulated de!reciation -145#000 -164#000
New equi!ment !urchased during &0=6 totaled .&/0#000. The &0=6 income statement disclosed
equi!ment de!reciation e"!ense of .64#000 and a .;#000 loss on the sale of equi!ment.
a. >etermine the cost and accumulated de!reciation of the equi!ment sold during &0=6.
Cost of 7qui!ment Sold ? .53&#000 .3&<#000 .433#000
- .&/0#000- .1<&#000 - . ;#000
.1<&#000 .433#000 /1.0,,,,
Accumulated >e!reciation ? .164#000
@ . 145#000
/ +1,,,,
$. >etermine the selling !rice of the equi!ment sold. /1.0,,,,2/ +1,,,, ? /1+1,,,,
c. Show how the sale of equi!ment would a!!ear on a statement of cash flows !re!ared $
using the indirect method.
Cash Flows from *nvesting Activities:
Cash from Sale of 7qui! . 465#000
1. Cash flow information: %irect and indirect methods
The comparative year-end balance sheets of Sign Graphics, Inc., revealed the
following activity in the company's current accounts:
13-1 13-. 'ncrease 4 %ecrease5
Current assets
Cash .33#600 .13#&00 .&0#&00
Accounts receiva$le 'net) /1#/00 //#000 -6#&00
*nventor &61#600 &11#/00 ;#500
2re!aid e"!enses &3#600 &6#&00 4#&00
Current lia$ilities
Accounts !aa$le .4&1#500 .460#500 '.4<#000)
Ta"es !aa$le 61#500 6;#&00 -3#500
*nterest !aa$le ;#000 5#600 &#500
Accrued lia$ilities 1/#/00 50#600 -&4#500
Note !aa$le 66#000 A 66#000
The accounts !aa$le were for the !urchase of merchandise. 2re!aid e"!enses and accrued
lia$ilities relate to the firmBs selling and administrative e"!enses. The com!anBs condensed
income statement follows.
S*CN C-A2D*CS# *NC.
*ncome Statement
For the Eear 7nded >ecem$er 14# &0=3
Sales .<41#/00
:ess:
Cost of goods sold 1&1#000
? Cross !rofit .1;0#/00
:ess:
Selling F administrative
e"!enses .4/5#000
>e!reciation e"!ense 4<#000
*nterest e"!ense &<#000
&10#000
.450#/00
Add:
Cain on sale of land &4#/00
*ncome $efore ta"es *ncome
ta"es
.4/&#500
*ncome Ta"es 15#/00
Net income .463#/00
(ther data:
4. :ong-term investments were !urchased for cash at a cost of .<6#500.
&. Cash !roceeds from the sale of land totaled .<5#&00.
1. Store equi!ment of .66#000 was !urchased $ signing a short-term note !aa$le. Also# a
.430#000 telecommunications sstem was acquired $ issuing 1#000 shares of !referred stock.
6. A long-term note of .6;#600 was re!aid.
3. Twent thousand shares of common stock were issued at .3.4; !er share.
5. The com!an !aid cash dividends amounting to .4&/#500.
Instructions:
a. 2re!are the o!erating activities section of the com!anBs statement of cash flows#
assuming use of:
The %irect &ethod
Sign Cra!hics# *nc.
Statement of Cash Flows
For the Eear ended >ecem$er 14# &0=3
Cash Flow From (!erating
Activities:
Cash -eceived from customers
?'.<41#/00 G .6&00)
.<4/#000.00
Cash 2aments to Su!!liers?
'.1&1#000G.;#500G.4<#000)
.16;#500.00
2aments for selling F
administrative
e"!enses ?
'.4/5#000G.4&00G.&4#500)
.&0/#/00.00
Ta"es 2aid ?
'.15#/00G.3#500)
.6&#600.00
*nterest 2aid ?
'.&<#000-.&#500)
.&6#600.00
Total 2aments+>is$ursementHs '5&3#&00.00)
.;&#/00.00
. The 'ndirect &ethod.
Sign Cra!hics# *nc.
Statement of Cash Flows
For the Eear ended >ecem$er 14# &0=3
Cash flows from (!erating
Activities
Net *ncome .463#/00.00
>e!reciation 7"!ense .4<#000.00
Cain on Sale of :and '.&4#/00.00)
>ecrease Accounts -eceiva$le .6#&00.00
*ncrease *nventor '.;#500.00)
*ncrease 2re!aid 7"!enses '4#&00.00)
>ecrease Accounts 2aa$le '.4<#000.00)
>ecrease Ta"es 2aa$le '.3#500.00)
*ncrease *nterest 2aa$le .&#500.00
>ecrease Accrued :ia$ilities '.&4#500.00)
Total Ad9ustments
'.31#000.00)
Net Cash 2rovided for (!erating
Activities
.;&#/00.00
$. 2re!are the investing and financing activities sections of the statement of cash flows.
Sign Cra!hics# *nc.
Statement of Cash Flows
For the Eear ended >ecem$er 14# &0=3
Cash Flows from Financing
Activities:
*ssuance of Common Stock .401#/00.00
Cash >ividends 2aid '.4&/#500.00)
2ament of :ong-Term Note '.6;#600.00)
Net Cash in Financing Activities '<6#&00.00)
Cash Flows from *nvesting
Activities:
2roceeds from the Sale of
:and
.<5#&00.00
:ong-Term *nvestments
2urchased
'.<6#500.00)
Net Cash 2rovided from
*nvestment Activities
.4500.00