Cash Flows
Cash Flows
Aleshia Wisch
ACC206: Principles of Accounting II
Prof. Eric Sumners
August 11, 2014
ACC 206 Week Assignment
1. Critical Thinking Question:
Answer the following questions:
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?
It is important for a company to show what assets they have on hand that can convert to cash. Non cash transactions are disclosed in the footnotes of the financial statement of cash flows. “…a company may exchange common stock for land. Such transactions do not trigger a direct inflow or outflow of cash, but they are nonetheless highly significant investing/financing events” (Bridgepoint Education, 2012, Sec. 1.1). Essentially, it shows what the company is trading through investments and financial exchanges.
2. 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.
a. ___I_____ Received $80,000 from the sale of land.
b. __ O_____ Received $3,200 from cash sales.
c. ___F_____ Paid a $5,000 dividend.
d. ___O_____ Purchased $8,800 of merchandise for cash.
e. ___F_____ Received $100,000 from the issuance of common stock.
f. ___F/O_____ Paid $1,200 of interest on a note payable. – When using the indirect method we add this back to the Net Income.
g. ___I_____ Acquired a new laser printer by paying $650.
h. ___N_____ Acquired a $400,000 building by signing a $400,000 mortgage note.
3. Overview of direct and indirect methods
Evaluate the comments that follow as being True or False. If the comment is false, briefly explain why.
a. Both the direct and indirect methods will produce the same cash flow from operating activities.
True
b. Depreciation expense is added back to net income when the indirect method is used.
True
c. One
Aleshia Wisch
ACC206: Principles of Accounting II
Prof. Eric Sumners
August 11, 2014
ACC 206 Week Assignment
1. Critical Thinking Question:
Answer the following questions:
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?
It is important for a company to show what assets they have on hand that can convert to cash. Non cash transactions are disclosed in the footnotes of the financial statement of cash flows. “…a company may exchange common stock for land. Such transactions do not trigger a direct inflow or outflow of cash, but they are nonetheless highly significant investing/financing events” (Bridgepoint Education, 2012, Sec. 1.1). Essentially, it shows what the company is trading through investments and financial exchanges.
2. 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.
a. ___I_____ Received $80,000 from the sale of land.
b. __ O_____ Received $3,200 from cash sales.
c. ___F_____ Paid a $5,000 dividend.
d. ___O_____ Purchased $8,800 of merchandise for cash.
e. ___F_____ Received $100,000 from the issuance of common stock.
f. ___F/O_____ Paid $1,200 of interest on a note payable. – When using the indirect method we add this back to the Net Income.
g. ___I_____ Acquired a new laser printer by paying $650.
h. ___N_____ Acquired a $400,000 building by signing a $400,000 mortgage note.
3. Overview of direct and indirect methods
Evaluate the comments that follow as being True or False. If the comment is false, briefly explain why.
a. Both the direct and indirect methods will produce the same cash flow from operating activities.
True
b. Depreciation expense is added back to net income when the indirect method is used.
True
c. One
References: N. A. (2013). Cash Flow from Operating Activities: Direct Method. Retrieved from www.accountingexplained.com N. A. (2013). Cash Flow from Operating Activities Indirect Method. Retrieved from www.accountingexplained.com Principles of Accounting: Volume II (2012). San Diego, CA: Bridgepoint Education.