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ACC206 W1 New 2013

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Chapter 1 Exercise 1:
1. Classification of activities

Classify each of the following transactions as arising from an operating (O), investing (I), financing (F), or noncash investing/financing (N) activity.

a. ________ Received $80,000 from the sale of land.
b. ________ Received $3,200 from cash sales.
c. ________ Paid a $5,000 dividend.
d. ________ Purchased $8,800 of merchandise for cash.
e. ________ Received $100,000 from the issuance of common stock.
f. ________ Paid $1,200 of interest on a note payable.
g. ________ Acquired a new laser printer by paying $650.
h. ________ Acquired a $400,000 building by signing a $400,000 mortgage note.

Chapter 1 Exercise 4:
4. Overview of direct and indirect methods

Evaluate the comments that follow as being True or False. If the comment is false, briefly explain why.
a. Both the direct and indirect methods will produce the same cash flow from operating activities.
b. Depreciation expense is added back to net income when the indirect method is used.
c. One of the advantages of using the direct method rather than the indirect method is that larger cash flows from financing activities will be reported.
d. The cash paid to suppliers is normally disclosed on the statement of cash flows when the indirect method of statement preparation is employed.
e. The dollar change in the Merchandise Inventory account appears on the statement of cash flows only when the direct method of statement preparation is used.

Chapter 1 Exercise 6:

The property, plant, and equipment section of ProComp Inc.’s comparative balance
sheet follows:

Dec. 31, 20X4Dec. 31, 20X3
Land 94,000 94,000
Equipment 652,000 527,000
Less: Accumulated depreciation (316,000) (341,000)

New equipment purchased during 20X4 totaled $280,000. The 20X4 income statement
disclosed equipment depreciation expense of $41,000 and a $9,000 loss on the
sale of equipment.

a. Determine the cost and accumulated depreciation of the equipment sold during 20X4.
b. Determine the selling price of the equipment sold.
c. Show how the sale of equipment would appear on a statement of cash flows prepared
by using the indirect method.

Chapter 1 Problem 3:

Cash flow information: Direct and indirect methods
The comparative year-end balance sheets of Sign Graphics Inc. revealed the following
activity in the company’s current accounts:



The accounts payable were for the purchase of merchandise. Prepaid expenses and
accrued liabilities relate to the firm’s selling and administrative expenses. The company’s
condensed income statement follows:

SIGN GRAPHICS INC.
Income Statement
for the Year Ended December 31, 20X5

Sales 713,800
Less: Cost of goods sold 323,000
Gross profit 390,800
Less: Selling & administrative expenses 186,000
Depreciation expense 17,000
Interest expense 27,000 230,000
Add: Gain on sale of land 160,800
 21,800
Income before taxes 182,600
Income taxes 36,800
Net income 145,800

Other data:
1. Long-term investments were purchased for cash at a cost of $74,600.
2. Cash proceeds from the sale of land totaled $76,200.
3. Store equipment of $44,000 was purchased by signing a short-term note payable.
Also, a $150,000 telecommunications system was acquired by issuing
3,000 shares of preferred stock.
4. A long-term note of $49,400 was repaid.
5. Twenty thousand shares of common stock were issued at $5.19 per share.
6. The company paid cash dividends amounting to $128,600.

Instructions
a. Prepare the operating activities section of the company’s statement of cash flows,
assuming use of
1) the direct method.
2) the indirect method.
b. Prepare the investing and financing activities sections of the statement of cash flows.

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