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Income Statement Task
Income Statement Task
Income Statement Task
Categorized cash flow information is more useful than a mere listing of cash flows in random order. In
the table below, determine the cash flow classification which applies to each item by double clicking on
the shaded box in the cash flow classification column and selecting one or more classifications. A
particular classification may be used once, more than once, or not at all.
Rationale:
* Both of these cash outflows include interest (operating cash flow component) and
principal amounts (financing cash flow component).
Two formats are currently available for reporting the statement of cash flows. Some items are
reported regardless of the format chosen by the firm. Other items appear only in one format, but not
the other. Use the table below to indicate whether the item appears in the SCF and related schedules
for the direct method format, both formats, or neither. Double click on the shaded box in the
"Inclusion in SCF Depending on Format" column to select the appropriate format designation. A
particular format designation may be used once, more than once, or not at all.
Rationale:
Note: Several items above are reconciling items, such as change in income taxes for the
period and patent amortization. The reconciliation of income and net cash flow from
operations appears in both formats.
When preparing the SCF, the accountant often must consider more than one source of information.
The analysis of transactions is a method frequently employed for determining the appropriate
disclosure in more complex situations. Two situations are presented in this tab. Use the form below to
enter your response. For each situation, the line item as it would appear in the Year 2 direct method
SCF in column A has been entered for you. You are to enter the dollar amount in one of columns B
through E. Enter only one dollar amount per line item. Use parentheses for negative amounts (cash
outflows and subtraction items in the reconciliation). Enter 0 in columns B through E if no other entry
is appropriate.
Situation 1
From the Year 2 annual report (income statement for Year 2):
Cost of goods sold $10,000
From the comparative balance sheet:
Year 1 Year 2
Inventory $9,000 $11,000
Accounts payable 7,000 10,000
Situation 2
Rationale:
The inventory increase reflects a payment not accounted for in cost of goods sold; therefore
the increase is subtracted from income in the reconciliation. The accounts payable increase
is an increase in purchases and therefore cost of goods sold, but it is not reflected in
payments; therefore, the increase is added back to income in the reconciliation.
The purchase is an investing cash outflow. The proceeds from sale is an investing cash
inflow. Depreciation expense also is added to income because it is a noncash expense. The
loss of $3,000 is the difference between the $7,000 book value of the item sold ($7,000 =
$12,000 cost - $5,000 accumulated depreciation) and the $4,000 proceeds. The loss is
added to income in the reconciliation because it does not represent a cash outflow yet
income was reduced.
Prepare the 2010 statement of cash flows for the Benz Company, using the information below. All the
information is provided; assume no other data. Prepare the statement using the direct method format
by entering cash flows and reconciling items into the form below. In column A, the name or
description has been entered for you. In column B, enter the amount of each item using parentheses
for outflows or negative amounts. In column C, enter your net cash flow amounts and other subtotals.
Enter 0 if no other amount is appropriate.
Information from the Benz Company's 2010 annual report appears below. This information will be
used to prepare the firm's 2010 statement of cash flows.
Sales $400
Wages expense (125)
Rent expense (100)
Depreciation expense (75)
Net income $100
2009 2010
Cash $100 $155
AR 50 75
Prepaid rent 70 50
Equipment 300 400
Accum. Dep. (75) (150)
Total Assets $445 $530
Wages payable 30 10
Capital stock 200 230
Retained earnings 215 290
Total L+OE $445 $530
Indicate whether each of the following should be classified as an operating, investing, or financing
activity on the statement of cash flows.
Operating,
Investing or
Financing
1. Payment for inventory Operating
2. Payment of dividend Financing
3. Cash received from sale of equipment Investing
4. Cash sales Operating
5. Issuance of stock to investors Financing
6. Payment of utility bill Operating
7. Payment of interest on long-term note payable Operating
8. Purchase of treasury stock Financing