Question

Explain the effect of each activity on the statement of cash flows of the company for the year 20XX Purchase of treasury stock, Purchase of available for sale investment, Sale of equipment at a loss, Increase in accounts payable, Retirement of bonds, Issuance of bonds, Decrease in accounts payable, Increase in inventory, Loan from bank by signing a note, Increase in accounts receivable, Purchase of equipment by issuing a note, Purchase of land and building, Decrease in accounts receivable, Payment of dividends, Issuance of stock for cash, Sale of land at a gain, Depreciation expense, Sale of land at book value, sign a contract to ship 1 container every month to Iraq for cash, benefit from zero interest loan.

Answer 1

1.Purchase of treasury stock - Purchase of treasury stock, results in a decrease of the shareholders equity. Thus is should be reported as an outflow under the Financing activity.

2.Purchase of available for sale investment - This is an investment activity, with the motive to make gains by selling it at a later period. - Cash outflow under Investing activity.

3.Sale of equipment at a loss - Equipments are held as asset (investment), to generate future economic cash inflows. Entire sales should be shown as Cash intflow under Investing activity. Loss should be added back to net operating income under Operating activities.

4.Increase in accounts payable - Change Current Liabilities and Current assets are shown under operating activities.Increase in accounts payable will be shown as increase in cash under Operating Activities

5.Retirement of bonds - Bonds are issued for financing the business, thus retirement of the same will be shown under Financing activity.

6.Issuance of bonds - Bonds are issued for financing the business, thus shown under Financing activity.

7.Decrease in accounts payable - Change Current Liabilities and Current assets are shown under operating activities.Decrease in accounts payable will be shown as decrease in cash under Operating Activities

8.Increase in inventory - Change Current Liabilities and Current assets are shown under operating activities.Increase in Inventory will be shown as decrease in cash under Operating Activities

9.Loan from bank by signing a note - Loan from banks are taken for financing the business. Under Financing activity

10.Increase in accounts receivable - Change Current Liabilities and Current assets are shown under operating activities.Increase in accounts receivable will be shown as decrease in cash under Operating Activities

11.Purchase of equipment by issuing a note - Purchase of equipment is an investing activity. But it is purchased by issuing Note, there is no cash transaction. Not reported in cash flow

12.Purchase of land and building - Purchase of equipment is an investing activity. Show as cash outflow in Investing activities

13.Decrease in accounts receivable - hange Current Liabilities and Current assets are shown under operating activities.Decrease in accounts receivable will be shown as Increase in cash under Operating Activities

14.Payment of dividends - Dividends are issued to share holders for financing the business. Thus under financing activities

15.Issuance of stock for cash - Stocks are issued for financing the company. Thus under financing activities

16.Sale of land at a gain - Land are held as asset (investment), to generate future economic cash inflows. Entire sales  should be shown as Cash inflow under Investing activity. Gain should be reduced from net operating income under Operating activities.

17.Depreciation expense - Non cash transaction. Added back to net income under Operating activities.

18.Sale of land at book value - Land are held as asset (investment), to generate future economic cash inflows. Book value should be shown as Cash inflow under Investing activity.

19.sign a contract to ship 1 container every month to Iraq for cash - Non cash transaction. Not recorded in cash flow

20.benefit from zero interest loan - Non cash transaction. Not recorded in cash flow