Chapter 12, Problem 4E

To determine

Indicate Whether each of the following first-year transactions is classified as net cash inflows (outflows) from operating activities (NCFO), Investing activities (NCFI), or financing activity (NCFF) and to determine whether the effect is an inflow of cash (+) or outflow of cash (-), or use (NE) if the transaction has no effect.

Explanation of Solution

Statement of cash flows:

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. Recorded an adjusting entry to record accrued salaries expense:

Date	Accounts title and explanation	Ref.	Debit ($)	Credit ($)
	Salaries expenses		xxx
	Accrued salaries payable			xxx
	(To record accrued salaries expense)

Table (1)

• Supplies expense is a component of stockholders’ equity. There is an increase in the expense account which decreases the stockholders’ equity. Therefore, debit Supplies expense account.
• Accrued salaries payable is a liability and it is increased. Therefore, credit accrued salaries 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
Recorded an adjusting entry to record accrued salaries expense	No effect (NE)	No effect (NE)

Table (2)

2. Paid cash to purchase new equipment.

Date	Accounts title and explanation	Ref.	Debit ($)	Credit ($)
	Plant and equipment		xxx
	cash			xxx
	(To record the purchase of new equipment)

Table (3)

• Plant and equipment is an asset and it is increased. Therefore, debit plant and equipment 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
Paid cash to purchase new equipment.	Net cash flow from investing activity (NCFI)	Outflow (-)

Table (4)

3. Collected payments on account from customers.

Date	Accounts title and explanation	Ref.	Debit ($)	Credit ($)
	Cash		xxx
	Accounts receivable			xxx
	(To record the collection of payables from customers)

Table (5)

• 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 (6)

4. Recorded and paid interest on debt to creditors.

Date	Accounts title and explanation	Ref.	Debit ($)	Credit ($)
	Interest expense		xxx
	Cash			xxx
	(To record payment of interest to creditors)

Table (7)

• Interest expense is a component of stockholders’ equity. There is an increase in the expense account which decreases the stockholders’ equity. Therefore, debit interest 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 interest on debt to creditors	Net cash flow from operating activity (NCFO)	Outflow (-)

Table (8)

5. Declared and paid cash dividends to shareholders.

Date	Accounts title and explanation	Ref.	Debit ($)	Credit ($)
	Retained earnings		xxx
	Cash			xxx
	(To record payment of cash dividends)

Table (9)

• Retained earnings are a component of stockholders’ equity. There is an increase in the retained earnings account which decreases the stockholders’ equity. Therefore, debit retained earnings 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
Declared and paid cash dividends to shareholders.	Net cash flow from financing activity (NCFF)	Outflow (-)

Table (10)

6. Sold used equipment for cash dividends to shareholders.

Date	Accounts title and explanation	Ref.	Debit ($)	Credit ($)
	Cash		xxx
	Accumulated depreciation
	Plant and equipment			xxx
	(To record sale of equipment for cash dividends)

Table (11)

• Cash is an asset and it is increased. Therefore, debit cash account.
• Accumulated depreciation is a contra-asset account and it is decreased. Therefore, debit accumulated depreciation 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 used equipment for cash dividends to shareholders.	Net cash flow from investing activity (NCFI)	Inflow (+)

Table (12)

7. Prepaid rent for the following period.

Date	Accounts title and explanation	Ref.	Debit ($)	Credit ($)
	Prepaid expenses		xxx
	Cash			xxx
	(To record the payment of prepaid rent)

Table (13)

• Prepaid expense is an asset and it is increased. Therefore debit prepaid expenses 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 (14)

8. Prepaid principal on revolving credit loan form bank.

Date	Accounts title and explanation	Ref.	Debit ($)	Credit ($)
	Short-term debt		xxx
	Cash			xxx
	(To record credit loan from bank)

Table (15)

• Short-term debt is a liability and it is decreased. Therefore, debit short-term debt 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 principal on revolving credit loan form bank.	Net cash flow from financing activity (NCFF)	Outflow (-)

Table (16)

9. 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 (17)

• 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 (NE)	No effect (NE)

Table (18)

10. Made payments to suppliers on account.

Date	Accounts title and explanation	Ref.	Debit ($)	Credit ($)
	Accounts payable		xxx
	Cash			xxx
	(To record payments made to suppliers)

Table (19)

• Accounts payable is a liability and it is decreased. Therefore, debit accounts payable 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
Made payments to suppliers on account.	Net cash flow from operating activity (NCFO)	Outflow (-)

Table (20)