Question

The following transactions occurred during March 2021 for the Wainwright Corporation. The company owns and operates a wholesale warehouse 1. Issued 42,000 shares of common stock in exchange for $420,000 in cash. 2. Purchased equipment at a cost of $64,000. $22,000 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 $114,000. The company uses the perpetual inventory system 4. Credit sales for the month totaled $132,000. The cost of the goods sold was $82,000. 5. Paid $6,200 in rent on the warehouse building for the month of March 6. Paid $7.200 to an insurance company for fire and liability insurance for a one-year period beginning April 1, 2021. 7 Paid $82,000 on account for the merchandise purchased in 3. 8 Collected $67,000 from customers on account 9. Recorded depreciation expense of $2,200 for the month on the equipment. Required: 1. Analyze each transaction by indicating the cash effect and classify each as a financing, investing, and/or operating activity lo transaction can represent more than one type of activity), 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 $52.000. Complete this question by entering your answers in the tabs below. Prev 6 of 10 Next > O P thp N a W

Answer 1

(A)

1) In this transaction Common Stock issued $420000 for cash. Cash balance increased by $420000 for this transaction. The shareholders equity also increased by this transaction.

This transaction is a Financing activity.

2) In this transaction equipment purchased for $64000 and a cash payment of $22000 made. For the balance amount of (64000-22000) = $42000 a note is accepted by the company.

By this transaction cash balance decreased by $22000 and equipment balance increased by $64000. As well as a new liability i.e Notes payble of $ 42000 emerged.

This is an Investing activity.

3) Inventory purchased for $114000 on credit. For this transaction Inventory account increased and as well as creditors account also increased.

Cash balance was unchanged for this transaction as no cash was involved in this transaction.

This is an Operating activity but this transaction did not come to Cash Flow statement as no cash was involved in this transaction.

4) Cash balance was unchanged cause no cash is involved in this transaction. Credit sales was made for which debtors account and sales account increased.

This is an Operating activity but it did not came to cash flow as no cash was involved in the transaction.

5) Rent paid $6200 for which The Cash balance has decreased and Rent account increased.

This is an Operating activity.

6) In this transaction insurance premium of $7200 paid. Due to this transaction cash balance decreased and a current asset i.e prepaid insurance emerged.

This is an Operating activity.

7) Due to this transaction Cash balance decreased by $82000 and as well as the creditors or the accounts payable balance also decreased by the same amount.

This is an Operating activity.

8) Cash collected from the debtors of $67000. For this transaction Cash balance increased by $67000 and debtors balance or the accounts receivable balance decreased by the same amount.

This is an Operating activity.

9) This transaction had no effect on the Cash balance cause Depreciation is a non cash expense. The company paid no cash for the depreciation. So the Cash balance remained unchanged.

This is an Operating activity but it will not come to cash flow statement cause it is a non cash item.

(B)

Cash Flow from Operating Activity

Particulars Amount($)

Cash collected from Debtors 67000

Less: Cash paid to Creditors 82000

Less: Rent paid 6200

Less: Insurance Premium paid 7200

Cash from Operating activity - (28400)