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Ch 1 Critical Thinking Question 5:Answer the following questions:
Why are noncash transactions, such as the exchange of common stock a building, included on a statement of cash flows? How are these noncash transactions disclosed?
Chapter 1 Exercise 1:
1. Classification of activities
Classify each of the following transactions as arising from an operating (O), investing (I), financing (F), or noncash investing/financing (N) activity.
- ________ Received $80,000 from the sale of land.
- ________ Received $3,200 from cash sales.
- ________ Paid a $5,000 dividend.
- ________ Purchased $8,800 of merchandise for cash.
- ________ Received $100,000 from the issuance of common stock.
- ________ Paid $1,200 of interest on a note payable.
- ________ Acquired a new laser printer by paying $650.
- ________ Acquired a $400,000 building by signing a $400,000 mortgage note.
Chapter 1 Exercise 4:
4. Overview of direct and indirect methods
Evaluate the comments that follow as being True or False. If the comment is false, briefly explain why.
- Both the direct and indirect methods will produce the same cash flow from operating activities.
- Depreciation expense is added back to net income when the indirect method is used.
- 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.
- The cash paid to suppliers is normally disclosed on the statement of cash flows when the indirect method of statement preparation is employed.
- 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.
Chapter 1 Exercise 6:
6. Equipment transaction and cash flow reporting
Property, plant, & equipment |
Dec. 31, 20X4 |
Dec. 31, 20X3 |
Land |
$94,000 |
$94,000 |
Equipment |
652,000 |
527,000 |
Less: Accumulated depreciation |
-316,000 |
-341,000 |
New equipment purchased during 20x4 totaled $280,000. The 20x4 income statement disclosed equipment depreciation expense of $41,000 and a $9,000 loss on the sale of equipment.
- Determine the cost and accumulated depreciation of the equipment sold during 20X4.
- Determine the selling price of the equipment sold.
- Show how the sale of equipment would appear on a statement of cash flows prepared by using the indirect method.
Chapter 1 Problem 3:
3. 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:
20X5 |
20X4 |
Increase / Decrease) |
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Current assets |
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Cash |
$55,400 |
$35,200 |
$20,200 |
|
Accounts receivable (net) |
83,800 |
88,000 |
-4,200 |
|
Inventory |
243,400 |
233,800 |
9,600 |
|
Prepaid expenses |
25,400 |
24,200 |
1,200 |
|
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Current liabilities |
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Accounts payable |
$123,600 |
$140,600 |
($17,000) |
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Taxes payable |
43,600 |
49,200 |
-5,600 |
|
Interest payable |
9,000 |
6,400 |
2,600 |
|
Accrued liabilities |
38,800 |
60,400 |
-21,600 |
|
Note payable |
44,000 |
— |
44,000 |
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SIGN GRAPHICS INC.
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Income Statement
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for the Year Ended December 31, 20x5
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Sales |
$713,800
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Less: Cost of goods sold |
323,000
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Gross profit |
$390,800
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Less: Selling & administrative expenses |
$186,000
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Depreciation expense |
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17,000
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Interest expense |
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27,000
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230,000
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Add: gain on sale of land |
$160,800
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21,800
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Income before taxes |
$182,600
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Income taxes |
36,800
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Net income |
$145,800
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Other data:
- Long-term investments were purchased for cash at a cost of $74,600.
- Cash proceeds from the sale of land totaled $76,200.
- 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.
- A long-term note of $49,400 was repaid.
- Twenty thousand shares of common stock were issued at $5.19 per share.
- The company paid cash dividends amounting to $128,600.
Instructions:
- Prepare the operating activities section of the company's statement of cash flows, assuming use of:
- The direct method.
- The indirect method.
- Prepare the investing and financing activities sections of the statement of cash flows.
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