FINANCIAL ACCOUNTING ETEXT CARD
FINANCIAL ACCOUNTING ETEXT CARD
10th Edition
ISBN: 9781260918373
Author: Libby
Publisher: INTER MCG
Question
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Chapter 12, Problem 4E
To determine

Indicate Whether each of the following first-year transactions is classified as net cash inflows (outflows) from operating activities (NCFO), Investing activities (NCFI), or financing activity (NCFF) and to determine whether the effect is an inflow of cash (+) or outflow of cash (-), or use (NE) if the transaction has no effect.

Expert Solution & Answer
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Explanation of Solution

Statement of cash flows:

Statement of cash flow is a financial statement that shows the cash and cash equivalents of a company for a particular period of time. It shows the net changes in cash, by reporting the sources and uses of cash as a result of operating, investing, and financing activities of a company.

Operating activities:

Operating activities refer to the normal activities of a company to carry out the business. The examples for operating activities are purchase of inventory, payment of salary, sales, and others. Operating cash flows affects current assets and liabilities.

Investing activities:

Investing activities refer to the activities carried out by a company for acquisition of long term assets. The examples for investing activities are purchase of equipment, long term investment, sale of land, and others. Investing cash flows causes changes in non-current assets.

Financing activities:

Financing activities refer to the activities carried out by a company to mobilize funds to carry out the business activities. The examples for financing activities are purchase of bonds, issuance of common shares, and others. Financing cash flows have an impact on non-current liabilities and stockholders’ equity.

Prepare journal entries for the first year transactions.

1. Recorded an adjusting entry to record accrued salaries expense:

DateAccounts title and explanationRef.Debit ($)Credit ($)
 Salaries expenses xxx 
     Accrued salaries payable  xxx
 (To record accrued salaries expense)   

Table (1)

  • Supplies expense is a component of stockholders’ equity. There is an increase in the expense account which decreases the stockholders’ equity. Therefore, debit Supplies expense account.
  • Accrued salaries payable is a liability and it is increased. Therefore, credit accrued salaries payable account.

The given transaction is matched with the cash flow activity and the related effects on cash.

TransactionCash Flow ActivityEffect on Cash
 Recorded an adjusting entry to record accrued salaries expenseNo effect (NE)No effect (NE)

Table (2)

2. Paid cash to purchase new equipment.

DateAccounts title and explanationRef.Debit ($)Credit ($)
 Plant and equipment xxx 
     cash  xxx
 (To record the purchase of new equipment)   

Table (3)

  • Plant and equipment is an asset and it is increased. Therefore, debit plant and equipment account.
  • Cash is an asset and it is decreased. Therefore, credit cash account.

The given transaction is matched with the cash flow activity and the related effects on cash.

TransactionCash Flow ActivityEffect on Cash
 Paid cash to purchase new equipment.Net cash flow from investing activity (NCFI)Outflow (-)

Table (4)

3. Collected payments on account from customers.

DateAccounts title and explanationRef.Debit ($)Credit ($)
 Cash xxx 
     Accounts receivable  xxx
 (To record the collection of payables from customers)   

Table (5)

  • Cash is an asset and it is increased. Therefore, debit cash account.
  • Accounts receivable is an asset and it is decreased. Therefore, credit accounts receivable account.

The given transaction is matched with the cash flow activity and the related effects on cash.

TransactionCash Flow ActivityEffect on Cash

 Collected payments on account from customers

Net cash flow from operating activity (NCFO)Inflow (+)

Table (6)

4. Recorded and paid interest on debt to creditors.

DateAccounts title and explanationRef.Debit ($)Credit ($)
 Interest expense xxx 
     Cash  xxx
 (To record payment of interest to creditors)   

Table (7)

  • Interest expense is a component of stockholders’ equity. There is an increase in the expense account which decreases the stockholders’ equity. Therefore, debit interest expense account.
  • Cash is an asset and it is decreased. Therefore, credit cash account

The given transaction is matched with the cash flow activity and the related effects on cash.

TransactionCash Flow ActivityEffect on Cash
 Recorded and paid interest on debt to creditorsNet cash flow from operating activity (NCFO)Outflow (-)

Table (8)

5. Declared and paid cash dividends to shareholders.

DateAccounts title and explanationRef.Debit ($)Credit ($)
 Retained earnings xxx 
     Cash  xxx
 (To record payment of cash dividends)   

Table (9)

  • Retained earnings are a component of stockholders’ equity. There is an increase in the retained earnings account which decreases the stockholders’ equity. Therefore, debit retained earnings account.
  • Cash is an asset and it is decreased. Therefore, credit cash account.

The given transaction is matched with the cash flow activity and the related effects on cash.

TransactionCash Flow ActivityEffect on Cash

 Declared and paid cash dividends to shareholders.

Net cash flow from financing activity (NCFF)Outflow (-)

Table (10)

6. Sold used equipment for cash dividends to shareholders.

DateAccounts title and explanationRef.Debit ($)Credit ($)
 Cash xxx 
 Accumulated depreciation   
     Plant and equipment  xxx
 (To record sale of equipment for cash dividends)   

Table (11)

  • Cash is an asset and it is increased. Therefore, debit cash account.
  • Accumulated depreciation is a contra-asset account and it is decreased. Therefore, debit accumulated depreciation account.
  • Plant and equipment is an asset and it is decreased. Therefore, credit plant and equipment account.

The given transaction is matched with the cash flow activity and the related effects on cash.

TransactionCash Flow ActivityEffect on Cash
 Sold used equipment for cash dividends to shareholders.Net cash flow from investing activity (NCFI)Inflow (+)

Table (12)

7. Prepaid rent for the following period.

DateAccounts title and explanationRef.Debit ($)Credit ($)
 Prepaid expenses xxx 
     Cash  xxx
 (To record the payment of prepaid rent)   

Table (13)

  • Prepaid expense is an asset and it is increased. Therefore debit prepaid expenses account.
  • Cash is an asset and it is decreased. Therefore, credit cash account.

The given transaction is matched with the cash flow activity and the related effects on cash.

TransactionCash Flow ActivityEffect on Cash
Prepaid rent for the following period.Net cash flow from operating activity (NCFO)Outflow (-)

Table (14)

8. Prepaid principal on revolving credit loan form bank.

DateAccounts title and explanationRef.Debit ($)Credit ($)
 Short-term debt xxx 
     Cash  xxx
 (To record credit loan from bank)   

Table (15)

  • Short-term debt is a liability and it is decreased. Therefore, debit short-term debt account.
  • Cash is an asset and it is decreased. Therefore, credit cash account.

The given transaction is matched with the cash flow activity and the related effects on cash.

TransactionCash Flow ActivityEffect on Cash
Prepaid principal on revolving credit loan form bank.Net cash flow from financing activity (NCFF)Outflow (-)

Table (16)

9. Purchased raw materials inventory on account.

DateAccounts title and explanationRef.Debit ($)Credit ($)
 Inventory xxx 
     Accounts payable  xxx
 (To record purchase of inventory on account)   

Table (17)

  • Inventory is an asset and it is decreased. Therefore debit inventory account.
  • Accounts payable is a liability and it is increased. Therefore, credit accounts payable account.

The given transaction is matched with the cash flow activity and the related effects on cash.

TransactionCash Flow ActivityEffect on Cash
Purchased raw materials inventory on account.No effect (NE)No effect (NE)

Table (18)

10. Made payments to suppliers on account.

DateAccounts title and explanationRef.Debit ($)Credit ($)
 Accounts payable xxx 
     Cash  xxx
 (To record payments made to suppliers)   

Table (19)

  • Accounts payable is a liability and it is decreased. Therefore, debit accounts payable account.
  • Cash is an asset and it is decreased. Therefore, credit cash account.

The given transaction is matched with the cash flow activity and the related effects on cash.

TransactionCash Flow ActivityEffect on Cash
 Made payments to suppliers on account.Net cash flow from operating activity (NCFO)Outflow (-)

Table (20)

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Chapter 12 Solutions

FINANCIAL ACCOUNTING ETEXT CARD

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