EXERCISE 1 (12 points) Classify each transaction as either: operating acivity (O

Question

EXERCISE 1 (12 points) Classify each transaction as either: operating acivity (O), investing activity (I), financing activity (F), or noncash investing and financing activity (NC). Also, indicate whether the transaction generated a cash inflow, cash outflow, or no cash flow effect. Activity Affected Outflow, or No Transaction O, I, F, NC Cash Flow effect 1 Bonds payable are issued for cash at a discount 2 Land is sold for cash at book value 3 Bonds payable is converted into common stock 4 Paid a cash dividend to preferred stockholders. 5 Land was acquired by issuing common stock 6 Recorded sales on account 7 Merchandise is sold to customers for cash 8 | Equipment is purchased by signing a 3-year, 10% note payable 9 Sold buildings and equipment for cash 10 Purchased inventory for cash. 11 Common stock is sold for cash above par value 12 Cash proceeds from disposal of plant asset

Explanation / Answer

Each transaction can be classified into following activities based on their nature:

1. Operating Activities :

Transactions which relate to day to day operations of an organisation are classified as operating activities. They include transactions resulting from providing services and producing and selling goods.

2. Investing Activities :

Transactions related to acquisition and disposal of long term fixed assets , investment intruments and lending & collection of loans are clasified as Investing activities.

3. Financing Activities :

Transactions related to raising capital such as issuance of stock or bonds , repayment of debts, payment of dividends are classified as Financing Activities.

4. Non cash investing and financing activity :

Transactions which does not affect cash flow but have significant impact on the capital and asset structure of the company are classified as non cash investing and financing activity.

Based on above discussion , the given transactions in question are classified as follows:

Sno. Transaction Activity Effected Cash inflow or outflow or no cash effect 1 Bonds payable are issued for cash at a discount Financing Activity Cash inflow 2 Land is sold for cash at book value Investing Activity Cash inflow 3 Bonds payable is converted into common stock Non cash Investing and Financing Activity No cash Effect 4 Paid a cash dividend to preferred stockholders Financing Activity Cash Outflow 5 Land was acquired by issuing common stock Non cash Investing and Financing Activity No cash effect 6 Recorded sales on account Non cash Operating Activity No cash Effect 7 Mercandise is sold to customers for cash Operating Activity Cash inflow 8 Equipment is purchased by signing 3yrs 10% note payable Non cash Investing and Financing Activity No cash Effect 9 Sold buildings and eqiupment for cash Investing Activity Cash Inflow 10 Purchased Inventory for cash Operating Activity Cash Outflow 11 Common stock is sold for cash above par value Financing Activity Cash Inflow 12 Cash proceeds from disposal of plant assets Investing Activity Cash Inflow

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