Question

Each of the following items must be considered in preparing a statement of cash flows. Indicate where each item is to be reported in the statement, if at all. Assume that net income is reported as $90,000.(a) Accounts receivable increased from $34,000 to $39,000 from the beginning to the end of the year.(b) During the year, 10,000 shares of preferred stock with a par value of $100 per share were issued at $115 per share.(c) Depreciation expense amounted to $14,000, and bond premium amortization amounted to $5,000.(d) Land increased from $10,000 to $30,000.

Answer 1

Answer:

(a) Operating activity

(b) Financing activity

(c) Operating activity

(d) Investing activity

Explanation:

Basically there are three types of activities:

1. Operating activities: It includes those transactions which affect the working capital, and it records transactions of cash receipts and cash payments.

2. Investing activities: It records those activities which include purchase and sale of the fixed assets

3. Financing activities: It records those activities which affect the long term liability and shareholder equity balance.  

So,

(a) Increase in accounts receivable come under the operating activities, and this is to be in a negative amount

(b) Issue of preference shares comes under financing activity, and this is added while computing the financing activities

(c) The depreciation expenses are added in the net income whereas the bond premium amortization is to be deducted from the net income. These both items have come under operating activities

(d) An increase in land value comes under the investing activity.