Financial Accounting
Financial Accounting
10th Edition
ISBN: 9781260481563
Author: Libby, Robert
Publisher: MCGRAW-HILL HIGHER EDUCATION
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Chapter 12, Problem 5E
To determine

Indicate whether each of the following 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.

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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. 1. 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 (1)

  • 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 accountNo effect (NE)No effect (NE)

Table (2)

2. Prepaid rent for the following period.

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

Table (3)

  • Prepaid expense is an asset and it is increased. Therefore, debit prepaid 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
 Prepaid rent for the following periodNet cash flow from operating activity (NCFO)Outflow (-)

Table (4)

3. Purchased new equipment by signing a three-year note.

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

Table (5)

  • Plant and equipment is an asset and it is increased. Therefore, debit plant and equipment account.
  • Note payable is a liability and it is increased. Therefore, credit note payable account.

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

TransactionCash Flow ActivityEffect on Cash
 Purchased new equipment by signing a three-year noteNo effect (NE)No effect (NE)

Table (6)

4. Recorded an adjusting entry for expiration of a prepaid expense.

DateAccounts title and explanationRef.Debit ($)Credit ($)
 Expense xxx 
     Prepaid expense  xxx
 (To record adjusting entry for expiration of prepaid expense)   

Table (7)

  • Expense is a component of stockholders’ equity. There is an increase in the expense account which decreases the stockholders’ equity. Therefore, debit expense account.
  • Prepaid expense is an asset and it is decreased. Therefore, credit prepaid expense 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 for expiration of a prepaid expenseNo effect (NE)No effect (NE)

Table (8)

5. Recorded and paid income taxes to the federal government.

DateAccounts title and explanationRef.Debit ($)Credit ($)
 Income tax expense xxx 
     Cash  xxx
 (To record payment of income tax)   

Table (9)

  • Income tax expense is a component of stockholders’ equity. There is an increase in the expense account which decreases the stockholders’ equity. Therefore, debit income tax 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 income taxes to the federal government

Net cash flow from operating activity (NCFO)Outflow (-)

Table (10)

6. Purchased investment securities for cash.

DateAccounts title and explanationRef.Debit ($)Credit ($)
 Investment securities   
     Cash  xxx
 (To record purchase of investment securities for cash)   

Table (11)

  • Investment securities are an asset and it is increased. Therefore, debit investment securities 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
Purchased investment securities for cashNet cash flow from investing activity (NCFI)Outflow (-)

Table (12)

7. Issued common stock for cash.

DateAccounts title and explanationRef.Debit ($)Credit ($)
 Cash xxx 
     Common stock  xxx
     Additional paid-in capital   
 (To record issuance of common stock for cash)   

Table (13)

  • Cash is an asset and it is increased. Therefore, debit cash account.
  • Common stock is a component of stockholders’ equity and there is a decrease in the common stock which increases the stockholder’s equity. Therefore, credit stockholders’ equity account.
  • Additional paid-in capital is a component of stockholders’ equity and there is a decrease in the common stock which increases the stockholders’ equity. Therefore, credit stockholders’ equity account.

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

TransactionCash Flow ActivityEffect on Cash
Issued common stock for cashNet cash flow from financing activity (NCFF)Inflow (+)

Table (14)

8. Collected payments on account from customers.

DateAccounts title and explanationRef.Debit ($)Credit ($)
 Cash xxx 
     Accounts receivable  xxx
 (To record collections from customers on account)   

Table (15)

  • 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 customersNet cash flow from operating activity (NCFO)Inflow (+)

Table (16)

9. Sold equipment for cash equal to its net book value.

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

Table (17)

  • Cash is an asset and it is increased. Therefore, debit cash 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 equipment for cash equal to its net book value.Net cash flow from investing activity (NCFI)Inflow (+)

Table (18)

10. Issued long-term debt for cash.

DateAccounts title and explanationRef.Debit ($)Credit ($)
 Cash xxx 
     Long-term debt  xxx
 (To record issuance of long-term debt for cash)   

Table (19)

  • Cash is an asset and it is increased. Therefore, debit cash account.
  • Long-term debt is a liability and it is increased. Therefore, credit long-term debt account.

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

TransactionCash Flow ActivityEffect on Cash
 Issued long-term debt for cashNet cash flow from financing activity (NCFF)Inflow (+)

Table (20)

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Chapter 12 Solutions

Financial Accounting

Ch. 12 - Prob. 11QCh. 12 - Prob. 12QCh. 12 - Prob. 13QCh. 12 - Prob. 1MCQCh. 12 - Prob. 2MCQCh. 12 - 3. If the balance in prepaid expenses has...Ch. 12 - Prob. 4MCQCh. 12 - 5. Which of the following would not appear in the...Ch. 12 - Prob. 6MCQCh. 12 - Prob. 7MCQCh. 12 - 8. Consider the following: Issued common stock for...Ch. 12 - Prob. 9MCQCh. 12 - 10. The total change in cash as shown near the...Ch. 12 - MolsonCoors Brewing Company is the world’s fifth...Ch. 12 - Determining the Effects of Account Changes on Cash...Ch. 12 - Matching Items Reported to Cash Flow Statement...Ch. 12 - Prob. 4MECh. 12 - Computing Cash Flows from Investing...Ch. 12 - Computing Cash Flows from Financing...Ch. 12 - Prob. 7MECh. 12 - Adidas AG is a global company that designs and...Ch. 12 - Dell Technologies Inc. is an integrated IT...Ch. 12 - Woolworths Group is one of the largest retailers...Ch. 12 - Prob. 4ECh. 12 - Prob. 5ECh. 12 - Comparing the Direct and Indirect Methods To...Ch. 12 - E12-7 Reporting Cash Flows from Operating...Ch. 12 - E12-8 Reporting and Interpreting Cash Flows from...Ch. 12 - Time Warner Inc. is a leading media and...Ch. 12 - Reporting and Interpreting Cash Flows from...Ch. 12 - E 12-11 Inferring Balance Sheet Changes from the...Ch. 12 - Prob. 12ECh. 12 - E12-13 (Chapter Supplement B) Computing and...Ch. 12 - During the period, Sanchez Company sold some...Ch. 12 - Prob. 15ECh. 12 - Prob. 16ECh. 12 - Prob. 17ECh. 12 - Computer Service and Repair was started five years...Ch. 12 - Prob. 19ECh. 12 - E12-20 Reporting Noncash Transactions on the...Ch. 12 - E12-21 (Chapter Supplement A) Reporting Cash Flows...Ch. 12 - E12-22 (Chapter Supplement A) Reporting and...Ch. 12 - E12-23 (Chapter Supplement A) Reporting and...Ch. 12 - Prob. 24ECh. 12 - Prob. 1PCh. 12 - BGP Electrical Supply is developing its annual...Ch. 12 - Prob. 3PCh. 12 - Prob. 4PCh. 12 - XS Supply Company is developing its annual...Ch. 12 - Prob. 6PCh. 12 - Ingersol Construction Supply Company is developing...Ch. 12 - Prob. 2APCh. 12 - Prob. 3APCh. 12 - CON12-1 Preparing the Statement of Cash Flows...Ch. 12 - Refer to the financial statements of American...Ch. 12 - Prob. 2CPCh. 12 - Prob. 3CPCh. 12 - Rocky Mountain Chocolate Factory manufactures an...Ch. 12 - CP12-5 Making a Decision as a Financial Analyst:...Ch. 12 - Critical Thinking Case Ethical Decision Making: A...
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