Correct classification of cash flows is critical to the accurate reporting of cash flow information.

Categorized cash flow information is more useful than a mere listing of cash flows in random order. In
the table below, determine the cash flow classification which applies to each item by double clicking on
the shaded box in the cash flow classification column and selecting one or more classifications. A
particular classification may be used once, more than once, or not at all.

Item Cash Flow Classification

Payments to suppliers Operating cash flow
Interest payments Operating cash flow
Payments to retire bonds outstanding Financing cash flow
Down payment on purchase of equipment Investing cash flow
Obtain loan to purchase land to be held as an investment Financing cash flow
Purchase of treasury stock Financing cash flow
Depreciation expense Not a cash flow
Purchase of trading securities Operating cash flow
Operating cash flow and
Monthly mortgage payment*
Financing cash flow
Dividends received on investments Operating cash flow
Loss on disposal of equipment Not a cash flow
Proceeds from sale of securities available for sale Investing cash flow
Operating cash flow and
Annual lease payment on capital lease*
Financing cash flow
Payments to fund company pension plan Operating cash flow
Increase in accounts receivable for the period Not a cash flow

Rationale:

* Both of these cash outflows include interest (operating cash flow component) and
principal amounts (financing cash flow component).

Two formats are currently available for reporting the statement of cash flows. Some items are
reported regardless of the format chosen by the firm. Other items appear only in one format, but not
the other. Use the table below to indicate whether the item appears in the SCF and related schedules
for the direct method format, both formats, or neither. Double click on the shaded box in the
"Inclusion in SCF Depending on Format" column to select the appropriate format designation. A
particular format designation may be used once, more than once, or not at all.

Inclusion in SCF Depending

Item
on Format
Proceeds from sale of land held as an investment Both formats
Change in wages payable for the period Both formats
Income taxes paid Direct format only
Payments for insurance premiums Direct format only
Real estate taxes paid Direct format only
Change in income taxes for the period Both formats
Patent amortization Both formats
Cost of goods sold Does not appear in SCF
Proceeds from sale of long-term investment in bonds Both formats
Collections on loans to customers (principal portion) Both formats
Collections on loans to customers (interest portion) Direct format only
Dividends paid Both formats
Amortization of bond discount Both formats
Proceeds from sale of land used as a parking lot for the firm's
Both formats
customers
Purchase of securities appropriately classified as cash equivalents Does not appear in SCF

Rationale:

Note: Several items above are reconciling items, such as change in income taxes for the
period and patent amortization. The reconciliation of income and net cash flow from
operations appears in both formats.

When preparing the SCF, the accountant often must consider more than one source of information.
The analysis of transactions is a method frequently employed for determining the appropriate
disclosure in more complex situations. Two situations are presented in this tab. Use the form below to
enter your response. For each situation, the line item as it would appear in the Year 2 direct method
SCF in column A has been entered for you. You are to enter the dollar amount in one of columns B
through E. Enter only one dollar amount per line item. Use parentheses for negative amounts (cash
outflows and subtraction items in the reconciliation). Enter 0 in columns B through E if no other entry
is appropriate.

Situation 1
From the Year 2 annual report (income statement for Year 2):
Cost of goods sold $10,000
From the comparative balance sheet:
Year 1 Year 2
Inventory $9,000 $11,000
Accounts payable 7,000 10,000
Situation 2

1. Net property, plant and equipment increased $40,000 during Year 2.

2. Depreciation expense was $23,000 for Year 2.
3. A plant asset costing $12,000 (accumulated depreciation $5,000) was sold for
$4,000 in Year 2.

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A B C D E
Operating cash Investing cash Financing cash Reconciling
1 Line item description
flow flow flow amount
2 Situation 1
 3 Payments to suppliers ($9000) $0 $0 $0
4 Inventory increase $0 $0 $0 ($2000)
Accounts payable
5 $0 $0 $0 $3000
increase
6 Situation 2
7 Purchase of plant assets $0 ($70000) $0 $0
Proceeds from disposal
8 $0 $4000 $0 $0
of plant assets
9 Depreciation expense $0 $0 $0 $23000
Loss on sale of plant
10 $0 $0 $0 $3000
asset

Rationale:

Explanation for solution to situation 1:

Analysis of Inventory Account:

beginning balance + purchases - cost of goods sold = ending balance
9,000 + ? - 10,000 = 11,000
purchases = 12,000

Analysis of Accounts Payable Account:

beginning balance + purchases - payments = ending balance
7,000 + 12,000 - ? = 10,000
payments = 9,000

The inventory increase reflects a payment not accounted for in cost of goods sold; therefore
the increase is subtracted from income in the reconciliation. The accounts payable increase
is an increase in purchases and therefore cost of goods sold, but it is not reflected in
payments; therefore, the increase is added back to income in the reconciliation.

Explanation for solution to situation 2

Analysis of net property, plant and equipment:

beginning balance + purchases - book value of disposals - depreciation expense
= ending balance
purchases - book value of disposals - depreciation expense
= ending balance - beginning balance
purchases - 7,000 - 23,000 = 40,000
purchases = 70,000

The purchase is an investing cash outflow. The proceeds from sale is an investing cash
inflow. Depreciation expense also is added to income because it is a noncash expense. The
loss of $3,000 is the difference between the $7,000 book value of the item sold ($7,000 =
$12,000 cost - $5,000 accumulated depreciation) and the $4,000 proceeds. The loss is
added to income in the reconciliation because it does not represent a cash outflow yet
income was reduced.
Prepare the 2010 statement of cash flows for the Benz Company, using the information below. All the
information is provided; assume no other data. Prepare the statement using the direct method format
by entering cash flows and reconciling items into the form below. In column A, the name or
description has been entered for you. In column B, enter the amount of each item using parentheses
for outflows or negative amounts. In column C, enter your net cash flow amounts and other subtotals.
Enter 0 if no other amount is appropriate.

Information from the Benz Company's 2010 annual report appears below. This information will be
used to prepare the firm's 2010 statement of cash flows.

Income Statement for the Year Ended 12/31/10

Sales $400
Wages expense (125)
Rent expense (100)
Depreciation expense (75)
Net income $100

Comparative Balance Sheets 12/31/10

2009 2010
Cash $100 $155
AR 50 75
Prepaid rent 70 50
Equipment 300 400
Accum. Dep. (75) (150)
Total Assets $445 $530

Wages payable 30 10
Capital stock 200 230
Retained earnings 215 290
Total L+OE $445 $530

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A B C
Benz Company Statement of Cash Flows For the Year Ended
1
December 31, 2010
2 Operating Activities
3 Collections from customers $375 $0
4 Wages paid ($145) $0
5 Rent paid ($80) $0
6 NCF-operations $0 $150
7 Investing Activities
8 Purchase equipment ($100) $0
9 NCF-investing $0 ($100)
10 Financing Activities
 11 Issue capital stock $30 $0
12 Dividends paid ($25) $0
13 NCF-financing $0 $5
14 Increase in cash, 2010 $0 $55
15 Cash, 1/1/2010 $0 $100
16 Cash, 12/31/2010 $0 $155
17 Reconciliation of Net income and Net Flow from Operations
18 Net income $100 $0
19 Accounts receivable increase ($25) $0
20 Wages payable decrease ($20) $0
21 Prepaid rent decrease $20 $0
22 Depreciation expense $75 $0
23 NCF-operations $0 $150

Indicate whether each of the following should be classified as an operating, investing, or financing
activity on the statement of cash flows.

Operating,
Investing or
Financing
1. Payment for inventory Operating
2. Payment of dividend Financing
3. Cash received from sale of equipment Investing
4. Cash sales Operating
5. Issuance of stock to investors Financing
6. Payment of utility bill Operating
7. Payment of interest on long-term note payable Operating
8. Purchase of treasury stock Financing