Drexon Corp., which follows U.S. GAAP, uses the direct method to report its cash

Question

Drexon Corp., which follows U.S. GAAP, uses the direct method to report its cash flows. The CFO is assessing the impact on cash flows of 4 events during the fiscal year. Specify which category each event falls under (under the direct method) and note whether it increases cash, decreases cash, or has no impact on cash.

1. A gain of $8,200 is booked on the sale of an asset.

2. Depreciation and amortization expense totaling $50,000 is booked.

3. Drexon purchases a trading security which it classifies as noncurrent.

4. Accrued liabilities increase from $245,000 to $250,000.

1. A gain of $8,200 is booked on the sale of an asset.

2. Depreciation and amortization expense totaling $50,000 is booked.

3. Drexon purchases a trading security which it classifies as noncurrent.

4. Accrued liabilities increase from $245,000 to $250,000.

Explanation / Answer

1) Gain on Sale of Asset fall under cashflow from investment activities as we sale an asset in which fund have been invested earlier is now giving as additional cashflow. it results in increasing cashflow.

2) Depreciation and amortization Expenses are non-cash expenditure thus it doesnot effect the cashflow anyway.however it has been included in arriving operating income of entity thus an adjustment is need to be made in cashflow from operating activities in order to arrive at accurate figure of cashflow from operating actiivities.

3) if Drexon corp is into Security trading actiivities then the purchase of trading Security will be fall under cash flow from operating activities. As this is purchase of security thus it decreases the cashflow of an entity.

4) increase in liability results more cash flow to entity or deferement of a cash payment to third party.Thus anyways it helps in increasing the cashflow. liabiility is a source of finance for an entity thus it falls under cash flow from financing actiivites.

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