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ACC 206 Week Assignment
- 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?
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 “cash and cash equivalents” 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’s operating activities. Non-cash transactions mainly fall under this category of financing or investing activities that have no effect on the firm’s cash outlay or inflows. However, these transactions involves long-term resources and owner’s 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.
- 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 – Investing Activity
- ________ Received $3,200 from cash sales – Operating Activity
- ________ Paid a $5,000 dividend – Financing Activity
- ________ Purchased $8,800 of merchandise for cash – Investing Activity
- ________ Received $100,000 from the issuance of common stock – Financing Activity
- ________ Paid $1,200 of interest on a note payable – Financing Activity
- ________ Acquired a new laser printer by paying $650 – Investing Activity
- ________ Acquired a $400,000 building by signing a $400,000 mortgage note Non-cash Investing Activity
- 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 – False. This because direct method is not adjusted for other cash flow items including depreciation and exchange loss.
- Depreciation expense is added back to net income when the indirect method is used – True.
- 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.
- The cash paid to suppliers is normally disclosed on the statement of cash flows when the indirect method of statement preparation is employed – True.
- 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 – False; exchange losses adjustment are common with indirect method rather direct method.
- Equipment transaction and cash flow reporting
Dec. 31, 20X4
Dec. 31, 20X3
Property, Plant & Equipment:
Less: Accumulated depreciation
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.
- 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.
- Equipment Account As at 31st Dec. 2004 CR.
Bal. b/d 527,000
Acc. Depreciation (2003) 341,000
Provision for Dep. (2004) 316,000
Bal. c/d 652,000
- As at 31st Dec. 2004 CR.
Acc. Depreciation 41,000
Proceed from Sales 130,000
Loss on Disposal 9,000
Cost of the Equipment = $180,000
Accumulated Depreciation = $41,000
Selling Price = $130,000
Sample Cash Flow Statement
Cash Flow from Operating Activities
Net Profit before Tax xxxx
Loss on disposal of Equipment $9,000 $50,000
Cash Flow from Investing Activities
Purchase of Equipment (280,000)
Proceeds from Disposal of Equipment 130,000
- 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:
Increase / Decrease)
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