Question

Solve problem 13-2B using working papers or pencil/paper and then answer quiz questions based on your work. Question 1 (60 points) Match items that appear on the statement of cash flows for the year ended 12/31/20Y4 with the appropriate presentation on the statement. Decrease in salaries payable Increase in accounts receivable 1. added inflow in the operating activities section 2. subtracted outflow in the operating activities section Net income Cash paid for dividends 3. added inflow in the investing activities section Cash paid for construction of building 4. subtracted outflow in the investing activities section Cash received from issuing mortgage note 5. added inflow in the financing activities section Depreciation expense 6. subtracted outflow in the financing activities section Decrease in inventories

Answer 1

Cash flow statement provides summary of cash inflow and cash outflow during the year.

= sign represents match with

Decrease in salaries payable = 2 subtracted outflow in the operating activities section

In the indirect method, we deduct decrease in current liabilities as it represents amount paid. So, here decrease in salaries payable represents that we have paid the some part of salary due to which the balance of salary payable decreases.

For example opening balance of salaries payable was $10,000 and closing balance was $5,000. Now decease in salaries payable by $ 5,000 represents that company paid the part of salary i.e $5,000. In cash flow statement , we will deduct this amount in operating activities section as it represents outflow of cash.

Increase in accounts receivable = 2 subtracted outflow in the operating activities section

In the indirect method, We deduct increase in current assets .Here, increase in accounts receivable shows that we have made credit sales to a party due to which our non cash profit increased. In cash flow statement, we consider only cash items so, we deduct increase in accounts receivable.

For example opening balance of accounts receivable was $1,000 and closing balance was $2,000. Increase of accounts receivable by $1,000 represents that the company made credit sales of $1,000 to a party during the year. Due to this credit sales, non cash profit of company increased.So, we deduct this amount in operating activities section

Net income = 1 added inflow in the operating activities section

Net income also consist of some non cash part as we maintain books of accounts on accrual basis

In the indirect method , First we add net income in operating activities section as it consist of net of income and expenses .Taking net income as a base, we make further adjustment like adding back non cash expenses , deducting profit on sale of asset ( as it's represent non cash element and we show sale of asset in financing activities which represent actual cash inflow) , deduct increase in current assets as explained above, deduct decrease in current liabilities as explained above and so on.

Cash paid for dividends = 6 subtracted outflow in the financing activities section

To run any business, company requires funds so, all activities related to raising of funds for business shown under the head.of financing activities. Suppose, company raise funds by issue of preference share and equity shares and Company paid dividend to preference and equity shareholders for the amount invested by shareholder's in company so it's related to raising of funds.

Cash paid for construction of building = 4 subtracted outflow in investing activities section

Investing activities consist of all activities related to investment So,it shows cash inflow and outflows related to investment activities. For example cash inflow like sale of equipment and cash outflow like purchase of building or amount paid for construction of building

Cash received from issuing mortgage notes = 5 added inflow in financing activities section

As explained earlier, all activities related to raising of funds for business shown under the head of financing activities so, raising of funds by way of issuing of mortgage notes will be added in financing activities as it represents inflow of cash

Depreciation expense = 1 added inflow in the operating activities section

As explained earlier,Taking Net income as a base in operating activities, we add back depreciation expenses as depreciation expense is non cash expenditure and cash flow statement shows cash items only

Decrease in inventories =1 added inflow in the operating activities section

Reduction in inventory represents generation of cash by selling some part of inventory.

For example opening inventory was $25,000 and closing inventory was $20,000 so, reduction by $5,000 in inventory represents that inventory of $5,000 sold by company which leads to generation of cash .So, we add decrease in inventory in operating activities.