For each of the following transactions, select whether cash flows from operating
ID: 2478460 • Letter: F
Question
For each of the following transactions, select whether cash flows from operating activities will Increase, decrease, or remain the same: Purchased merchandise on credit. Paid an account payable in cash. Accrued payroll for the month but did not pay it. Borrowed money from the bank. The term of the note is 90 days. Reclassified a long-term note as a current liability. Paid accrued Interest expense. Disclosed a contingent liability based on a pending lawsuit. Paid back the bank for money borrowed in (d). Ignore interest. Collected cash from a customer for services that will be performed in the next accounting period (i.e., deferred revenues are recorded).Explanation / Answer
The effect along with explanation have been given in the following table:
Effect Explanation a Remain Same Since, purchases have been made on credit, there is no cash outflow at the time of purchase. b Decrease Payment made in respect of accounts payable is treated as a cash flow from operating activity. c Remain Same Since, the payment has not been made, it has not resulted in any outflow of cash. It will be treated as a cash outflow in the month in which the payment is actually made. d Remain Same Money borrowed will result in an inflow of cash. However, irrespective of the period, the amount of loan in any form is treated as a part of financing activity. e Remain Same The transaction involves no cash outflow. f Decrease Interest is treated as an operating expense for the purposes of preparing cash flow statement. g Remain Same Contigent liabilities are recorded as footnotes to financial statements. They have no cash flows till the time the event on the occurence of which they are contigent takes place. h Remain Same Payment of money borrowed is a financing activity. Hence, it will have no effect on the cash flow from operating activities. i Increase Cash received from customer will be accounted for as an operating activity. It will be recorded as a cash inflow in the period of receipt itself as it will result in an increase in the cash balance of the company.Related Questions
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