14-2SE - Horngren'S Financial And Managerial Accounting

Question

Question: Classifying items on the statement of cash flows Cash flow items

must be categorized into one of four categories. Identify each item as operating (O), investing (I), financing (F), or non-cash (N).

 a. Cash purchase of merchandise inventory

 b. Cash payment of dividends

 c. Cash receipt from the collection of long-term notes receivable 

d. Cash payment for income taxes 

e. Purchase of equipment in exchange for notes payable

 f. Cash receipt from the sale of land 

g. Cash received from borrowing money 

h. Cash receipt for interest income

 i. Cash receipt from the issuance of common stock

 j. Cash payment of salaries

 

Step-by-Step Solution

Answer

Answer

 

1. Operating (O)
2. Financing (F)
3. Investing (I)
4. Operating (O)
5. Non-cash (N)
6. Investing (I)
7. Financing (F)
8. Operating (O)
9. Financing (F)
10. Operating (O)

Step 1: Explanation for operating activities

Transaction	Activity	Explanation
a.Cash purchase of merchandise inventory	Operating	Purchase of inventory in the course of business is an operating activity.
d.Cash payment for   income taxes	Operating	Income tax is payable on the net income of the organization. Net income is a result of operating activities hence, payment of income tax is also an operating activity.
h.Cash receipt for interest income	Operating	There is no separate account for interest income therefore, it is credited in the statement of profit and loss and become part of operating activity.
j.Cash payment of salaries	Operating	There is no separate account for salaries and wages therefore, it is credited in the statement of profit and loss and become part of operating activity. Also, payment to employees is a day-to-day activity so it is an operating activity.

Step 2: Explanation for investing activities

Transaction	Activity	Explanation
c. Cash receipt from the collection of long-term notes receivable	Investing	Long-term notes receivable is a long-term asset hence Cash receipt from the collection of long-term notes receivable is an investing activity.
f. Cash receipt from the sale of land	Investing	Purchase of land is an investment. So, when the land is sold cash receipt from such sale is an investing activity.

Step 3: Explanation for investing activities

Transaction	Activity	Explanation
b. Cash payment of dividends	Financing	Dividend is paid to the common stockholders. Hence, it is a financing activity
g. Cash received from borrowing money	Financing	Cash is borrowed for funding business therefore, it is a financing activity.
i. Cash receipt from the issuance of common stock	Financing	Issuance of common stock is a financing activity.

Step 3: Explanation for non-cash activities

Transaction	Activity	Explanation
e. Purchase of equipment in exchange for notes payable	Non-cash	Purchase of equipment in exchange for notes payable does not involve cash therefore, it is classified as non-cash transaction.