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# Cash Flow Statement (Math Problem Sample)

Instructions:
a. Why are non-cash transactions, such as the exchange of common stock for a building for example, included on a statement of cash flows? How are these non-cash transactions disclosed? b. Prepare the operating activities section of the company\'s statement of cash flows, assuming use of: 1. The direct method. 2. The indirect method. source..
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ACC 206 Week Assignment Name Institution Date 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: 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. Workings DR. Equipment Account As at 31st Dec. 2004 CR. Bal. b/d 527,000 Purchases/Cash 280,000 Acc. Depreciation (2003) 341,000Provision for Dep. (2004) 316,000 Sales/Cash 180,000 Bal. c/d 652,000 \$1,148,000 \$1,148,000 Disposal A/C DR. As at 31st Dec. 2004 CR. Equipment 180,000 Acc. Depreciation 41,000 Proceed from Sales 130,000 Loss on Disposal 9,000 \$180,000 \$180,000 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 Adjusted for: Depreciation \$41,000 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: 20X5 20X4Increase / Decrease) Current assets 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Current liabilities Accounts payable \$123,600 \$140,600 (\$17,000)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The accounts payable were for the...
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