Question

The following transactions occurred during March 2021 for the Wainwright Corporation. The company owns and operates a wholesale warehouse. [These are the same transactions analyzed in Exercise 2–1, when we determined their effect on elements of the accounting equation.]
1. Issued 30,000 shares of common stock in exchange for $300,000 in cash.

2. Purchased equipment at a cost of $40,000. $10,000 cash was paid and a note payable to the seller was signed for the balance owed.
3. Purchased inventory on account at a cost of $90,000. The company uses the perpetual inventory system.
4. Credit sales for the month totaled $120,000. The cost of the goods sold was $70,000.
5. Paid $5,000 in rent on the warehouse building for the month of March.
6. Paid $6,000 to an insurance company for fire and liability insurance for a one-year period beginning April 1, 2021.
7. Paid $70,000 on account for the merchandise purchased in 3.
8. Collected $55,000 from customers on account.
9. Recorded depreciation expense of $1,000 for the month on the equipment.

 

Required:
1. Analyze each transaction and classify each as a financing, investing, and/or operating activity (a transaction can represent more than one type of activity). In doing so, also indicate the cash effect of each, if any. If there is no cash effect, simply place a check mark (√) in the appropriate column(s).
Example:

2. Prepare a statement of cash flows, using the direct method to present cash flows from operating activities. Assume the cash balance at the beginning of the month was $40,000.

Answer 1

1.

2.

 

       WAINWRIGHT CORPORATION

          Statement of Cash Flows

For the Month Ended March 31, 2021

 

Cash flows from operating activities:

  Cash received from customers                   $ 55,000

  Cash paid for rent                                             (5,000)

  Cash paid for insurance                                  (6,000)

  Cash paid for merchandise                           (70,000)

   Net cash flows from operating activities                    $ (26,000)

 

Cash flows from investing activities:

  Purchase of equipment                                (10,000)

   Net cash flows from investing activities                        (10,000)

 

Cash flows from financing activities:

  Issuance of common stock                       300,000

   Net cash flows from financing activities                       300,000

Net increase in cash                                                            264,000

Cash and cash equivalents, March 1                                  40,000

Cash and cash equivalents, March 31                           $ 304,000

 

Noncash investing and financing activities:                                   

 

Acquired $40,000 of equipment by paying cash and issuing a note as follows:
   Cost of equipment                                                          $40,000 

 Cash paid                                                                             10,000 

 Note issued                                                                       $30,000

Note issued                                                                       $30,000