Indicate whether each of the following transactions is classified as net
Explanation of Solution
Statement of
Statement of cash flow is a financial statement that shows the cash and cash equivalents of a company for a particular period of time. It shows the net changes in cash, by reporting the sources and uses of cash as a result of operating, investing, and financing activities of a company.
Operating activities:
Operating activities refer to the normal activities of a company to carry out the business. The examples for operating activities are purchase of inventory, payment of salary, sales, and others. Operating cash flows affects current assets and liabilities.
Investing activities:
Investing activities refer to the activities carried out by a company for acquisition of long term assets. The examples for investing activities are purchase of equipment, long term investment, sale of land, and others. Investing cash flows causes changes in non-current assets.
Financing activities:
Financing activities refer to the activities carried out by a company to mobilize funds to carry out the business activities. The examples for financing activities are purchase of bonds, issuance of common shares, and others. Financing cash flows have an impact on non-current liabilities and stockholders’ equity.
Prepare journal entries for the first year transactions.
- 1. Purchased raw materials inventory on account
| Date | Accounts title and explanation | Ref. | Debit ($) | Credit ($) |
| Inventory | xxx | |||
| Accounts payable | xxx | |||
| (To record purchase of inventory on account) |
Table (1)
- Inventory is an asset and it is decreased. Therefore, debit inventory account.
- Accounts payable is a liability and it is increased. Therefore, credit accounts payable account.
The given transaction is matched with the cash flow activity and the related effects on cash.
| Transaction | Cash Flow Activity | Effect on Cash |
| Purchased raw materials inventory on account | No effect (NA) | No effect (NA) |
Table (2)
2. Prepaid rent for the following period.
| Date | Accounts title and explanation | Ref. | Debit ($) | Credit ($) |
| Prepaid expense (rent) | xxx | |||
| cash | xxx | |||
| (To record the payment of prepaid rent) |
Table (3)
- Prepaid expense is an asset and it is increased. Therefore, debit prepaid expense account.
- Cash is an asset and it is decreased. Therefore, credit cash account.
The given transaction is matched with the cash flow activity and the related effects on cash.
| Transaction | Cash Flow Activity | Effect on Cash |
| Prepaid rent for the following period | Net cash flow from operating activity (NCFO) | Outflow (-) |
Table (4)
3. Purchased new equipment by signing a three-year note.
| Date | Accounts title and explanation | Ref. | Debit ($) | Credit ($) |
| Plant and equipment | xxx | |||
| Note payable | xxx | |||
| (To record the purchase of equipment) |
Table (5)
- Plant and equipment is an asset and it is increased. Therefore, debit plant and equipment account.
- Note payable is a liability and it is increased. Therefore, credit note payable account.
The given transaction is matched with the cash flow activity and the related effects on cash.
| Transaction | Cash Flow Activity | Effect on Cash |
| Purchased new equipment by signing a three-year note | No effect (NE) | No effect (NE) |
Table (6)
4. Recorded an
| Date | Accounts title and explanation | Ref. | Debit ($) | Credit ($) |
| Expense | xxx | |||
| Prepaid expense | xxx | |||
| (To record adjusting entry for expiration of prepaid expense) |
Table (7)
- Expense is a component of stockholders’ equity. There is an increase in the expense account which decreases the stockholders’ equity. Therefore, debit expense account.
- Prepaid expense is an asset and it is decreased. Therefore, credit prepaid expense account.
The given transaction is matched with the cash flow activity and the related effects on cash.
| Transaction | Cash Flow Activity | Effect on Cash |
| Recorded an adjusting entry for expiration of a prepaid expense | No effect (NE) | No effect (NE) |
Table (8)
5. Recorded and paid income taxes to the federal government.
| Date | Accounts title and explanation | Ref. | Debit ($) | Credit ($) |
| Income tax expense | xxx | |||
| Cash | xxx | |||
| (To record payment of income tax) |
Table (9)
- Income tax expense is a component of stockholders’ equity. There is an increase in the expense account which decreases the stockholders’ equity. Therefore, debit income tax expense account.
- Cash is an asset and it is decreased. Therefore, credit cash account.
The given transaction is matched with the cash flow activity and the related effects on cash.
| Transaction | Cash Flow Activity | Effect on Cash |
|
Recorded and paid income taxes to the federal government | Net cash flow from operating activity (NCFO) | Outflow (-) |
Table (10)
6. Purchased investment securities for cash.
| Date | Accounts title and explanation | Ref. | Debit ($) | Credit ($) |
| Investment securities | ||||
| Cash | xxx | |||
| (To record purchase of investment securities for cash) |
Table (11)
- Investment securities are an asset and it is increased. Therefore, debit investment securities account.
- Cash is an asset and it is decreased. Therefore, credit cash account
The given transaction is matched with the cash flow activity and the related effects on cash.
| Transaction | Cash Flow Activity | Effect on Cash |
| Purchased investment securities for cash | Net cash flow from investing activity (NCFI) | Outflow (-) |
Table (12)
7. Issued common stock for cash.
| Date | Accounts title and explanation | Ref. | Debit ($) | Credit ($) |
| Cash | xxx | |||
| Common stock | xxx | |||
| Additional paid-in capital | ||||
| (To record issuance of common stock for cash) |
Table (13)
- Cash is an asset and it is increased. Therefore, debit cash account.
- Common stock is a component of stockholders’ equity and there is a decrease in the common stock which increases the stockholder’s equity. Therefore, credit stockholders’ equity account.
- Additional paid-in capital is a component of stockholders’ equity and there is a decrease in the common stock which increases the stockholders’ equity. Therefore, credit stockholders’ equity account.
The given transaction is matched with the cash flow activity and the related effects on cash.
| Transaction | Cash Flow Activity | Effect on Cash |
| Issued common stock for cash | Net cash flow from financing activity (NCFF) | Inflow (+) |
Table (14)
8. Collected payments on account from customers.
| Date | Accounts title and explanation | Ref. | Debit ($) | Credit ($) |
| Cash | xxx | |||
| xxx | ||||
| (To record collections from customers on account) |
Table (15)
- Cash is an asset and it is increased. Therefore, debit cash account.
- Accounts receivable is an asset and it is decreased. Therefore, credit accounts receivable account.
The given transaction is matched with the cash flow activity and the related effects on cash.
| Transaction | Cash Flow Activity | Effect on Cash |
| Collected payments on account from customers | Net cash flow from operating activity (NCFO) | Inflow (+) |
Table (16)
9. Sold equipment for cash equal to its net book value.
| Date | Accounts title and explanation | Ref. | Debit ($) | Credit ($) |
| Cash | xxx | |||
| Plant and equipment | xxx | |||
| (To record sale of equipment for cash) |
Table (17)
- Cash is an asset and it is increased. Therefore, debit cash account.
- Plant and equipment is an asset and it is decreased. Therefore, credit plant and equipment account.
The given transaction is matched with the cash flow activity and the related effects on cash.
| Transaction | Cash Flow Activity | Effect on Cash |
| Sold equipment for cash equal to its net book value. | Net cash flow from investing activity (NCFI) | Inflow (+) |
Table (18)
10. Issued long-term debt for cash.
| Date | Accounts title and explanation | Ref. | Debit ($) | Credit ($) |
| Cash | xxx | |||
| Long-term debt | xxx | |||
| (To record issuance of long-term debt for cash) |
Table (19)
- Cash is an asset and it is increased. Therefore, debit cash account.
- Long-term debt is a liability and it is increased. Therefore, credit long-term debt account.
The given transaction is matched with the cash flow activity and the related effects on cash.
| Transaction | Cash Flow Activity | Effect on Cash |
| Issued long-term debt for cash | Net cash flow from financing activity (NCFF) | Inflow (+) |
Table (20)
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