Chapter 11, Problem 38E

Analyzing the Accounts

The controller for Summit Sales Inc. provides the following information on transactions that occurred during the year:

a. Purchased supplies on credit, $18,600

b. Paid $14,800 cash toward the purchase in Transaction a

c. Provided services to customers on credit1 $46,925

d. Collected $39,650 cash from accounts receivable

e. Recorded depreciation expense, $8,175

f. Employee salaries accrued, $15,650

g. Paid $15,650 cash to employees for salaries earned

h. Accrued interest expense on long-term debt, $1,950

i. Paid a total of $25,000 on long-term debt, which includes $1.950 interest from Transaction h

j. Paid $2,220 cash for l year’s insurance coverage in advance

k. Recognized insurance expense, $1,340, that was paid in a previous period

l. Sold equipment with a book value of $7,500 for $7,500 cash

m. Declared cash dividend, $12,000

n. Paid cash dividend declared in Transaction m

o. Purchased new equipment for $28,300 cash.

p. Issued common stock for $60,000 cash

q. Used $10,700 of supplies to produce revenues

Summit Sales uses the indirect method to prepare its statement of cash flows.

Required:

1. Construct a table similar to the one shown at the top of the next page. Analyze each transaction and indicate its effect on the fundamental accounting equation. If the transaction increases a financial statement element, write the amount of the increase preceded by a plus sign (+) in the appropriate column. If the transaction decreases a financial statement element, write the amount of the decrease preceded by a minus sign (-) in the appropriate column.

2. Indicate whether each transaction results in a cash inflow or a cash outflow in the “Effect on Cash Flows” column. If the transaction has no effect on cash flow, then indicate this by placing “none" in the “Effect on Cash Flows" column.

3. For each transaction that affected cash flows, indicate whether the cash flow would be classified as a cash flow from operating activities, cash flow from investing activities, or cash flow from financing activities. If there is no effect on cash flows, indicate this as a non-cash activity.

To determine

(a)

Concept introduction:

Cash flow statement shows inflow and outflow of cash and it is divided into three categories, i.e., operating, investing and financing activities. It is also known as statement of cash flows.

To construct:

A table and to indicate the effect of each transaction on the financial accounts in terms of cash inflow and cash outflow.

Answer to Problem 38E

The table is constructed providing the effect in the accounts due to each transaction by giving $+\text{ and }-$ to the values.

Explanation of Solution

Table showing the effect of each transaction on the financial accounts:

	Assets $\left(\$\right)$		Liabilities and Equity $\left(\$\right)$
Transactions	Current	Non-Current	Current	Non-Current	Equity
Purchased supplies on credit, $\$18,600$	$18,600$		$18,600$
Paid $\$14,800$ cash towards purchase in above	$-14,800$		$-14,800$
Provided services to customer on credit, $\$46,925$	$+46,925$				$+46,925$
Collected $\$39,650$ cash from account receivable	$\pm 39,650$
Record Depreciation expense, $\$8,175$	$-8,175$				$-8,175$
Employee salary accrued, $\$15,650$			$15,650$		$-15,650$
Paid $\$15,650$ cash to employees for salaries earned	$-15,650$		$-15,650$
Accrues Interest expense on long-term debt, $\$1,950$			$1,950$		$-1,950$
Paid a total of $\$25,000$ on long term debt, which includes $\$1,950$ from above transaction	$-25,000$		$-1,950$	$-23,050$
Paid $\$2,220$ cash for $1$ year’s insurance coverage in advance	$\pm 2,220$
Recognised insurance expense, $\$1,340$, that was paid in a previous year	$-1,340$				$-1,340$
Sold equipment with a book value of $\$7,500$ for $\$7,500$ cash	$7,500$	$-7,500$
Declared cash dividend, $\$12,000$			$12,000$		$-12,000$
Paid cash dividend declared in above	$-12,000$		$-12,000$
Purchased new equipment for $\$28,300$ cash	$-28,300$	$28,300$
Issued common stock for $\$60,000$ cash	$60,000$				$60,000$
Used $\$10,700$ of supplies to produce revenues	$-10,700$				$-10,700$

To determine

(b)

Concept introduction:

Cash flow statement shows inflow and outflow of cash and it is divided into three categories, i.e., operating, investing and financing activities. Itis also known as statement of cash flows.

To construct:

A table and indicate the effect of each transaction on the financial accounts in terms of cash inflow and cash outflow.

Answer to Problem 38E

The table is constructed providing the effect in the accounts due to each transaction in terms of cash inflow and cash outflow.

Explanation of Solution

Table showing the effect of each transaction on the financial accounts:

Transactions	Cash Flow $\left(\$\right)$
Purchased supplies on credit, $\$18,600$	None
Paid $\$14,800$ cash towards purchase in above	$14,800$ Cash outflow
Provided services to customer on credit, $\$46,925$	None
Collected $\$39,650$ cash from account receivable	$39,650$ Cash inflow
Record Depreciation expense, $\$8,175$	None
Employee salary accrued, $\$15,650$	None
Paid $\$15,650$ cash to employees for salaries earned	$15,650$ Cash outflow
Accrued Interest expense on long-term debt, $\$1,950$	None
Paid a total of $\$25,000$ on long term debt, which includes $\$1,950$ from above transaction	$25,000$ Cash outflow
Paid $\$2,220$ cash for $1$ year’s insurance coverage in advance	$2,220$ Cash outflow
Recognised insurance expense, $\$1,340$, that was paid in a previous year	None
Sold equipment with a book value of $\$7,500$ for $\$7,500$ cash	$7,500$ Cash inflow
Declared cash dividend, $\$12,000$	None
Paid cash dividend declared in above	$12,000$ Cash outflow
Purchased new equipment for $\$28,300$ cash	$28,300$ Cash outflow
Issued common stock for $\$60,000$ cash	$60,000$ Cash inflow
Used $\$10,700$ of supplies to produce revenues	None

To determine

(c)

Concept introduction:

Cash flow statement shows inflow and outflow of cash and it is divided into three categories, i.e., operating, investing and financing activities. Itis also known as statement of cash flows.

To construct:

A table and indicate the effect of each transaction on the financial accounts in terms of cash inflow and cash outflow.

Answer to Problem 38E

The table is constructed providing the classification of each transaction on the financial accounts in terms of cash flow from operating, investing and financing activities.

Explanation of Solution

Table showing the classification of each transaction on the financial accounts:

Transactions	Classification
Purchased supplies on credit, $\$18,600$	Non-cash activity
Paid $\$14,800$ cash towards purchase in above	Operating activity
Provided services to customer on credit, $\$46,925$	Non-cash activity
Collected $\$39,650$ cash from account receivable	Operating activity
Record Depreciation expense, $\$8,175$	Non-cash activity
Employee salary accrued, $\$15,650$	Non-cash activity
Paid $\$15,650$ cash to employees for salaries earned	Operating activity
Accrued Interest expense on long-term debt, $\$1,950$	Non-cash activity
Paid a total of $\$25,000$ on long term debt, which includes $\$1,950$ from above transaction	Investing activity
Paid $\$2,220$ cash for $1$ year’s insurance coverage in advance	Operating activity
Recognised insurance expense, $\$1,340$, that was paid in a previous year	Non-cash activity
Sold equipment with a book value of $\$7,500$ for $\$7,500$ cash	Investing activity
Declared cash dividend, $\$12,000$	Non-cash activity
Paid cash dividend declared in above	Financing activity
Purchased new equipment for $\$28,300$ cash	Investing activity
Issued common stock for $\$60,000$ cash	Financing activity
Used $\$10,700$ of supplies to produce revenues	Non-cash activity