Under the indirect method, depreciation expense is added to net income to report cash flows from operating activities. Does depreciation cause an inflow of cash?

Under what section of the Statement of Cash Flows would you classify the purchase of equipment by issuing a long-term note payable?

a. Operating

b. Investing.

c. Financing

d. Noncash activity

Refer to the information provided for Peach Computer in the earlier exercise.

Required: Prepare the operating activities section of the statement of cash flows for Peach Computer using the direct method.

Portions of the financial statements for Peach Computer are provided below.

$$\text{PEACH COMPUTER}\\ \text{Income Statement}\\ \text{For the year ended December 31, 2018}\\ \begin{matrix} \text{Net sales} & \text{ } & \text{$\$ 2,050,000$}\\ \text{Expenses:} & \text{ } & \text{ }\\ \text{Cost of goods sold} & \text{$\$ 1,150,000$} & \text{ }\\ \text{Operating expenses} & \text{$660,000$} & \text{ }\\ \text{Depreciation expense} & \text{$60,000$} & \text{ }\\ \text{Income tax expense} & \underline{50,000} & \text{ }\\ \text{Total expenses} & \text{ } & \underline{1,920,000}\\ \text{Net income} & \text{ } & \underline{\underline{\$ 130,000}}\\ \end{matrix}$$

$$\text{PEACH COMPUTER}\\ \text{Selected Balance Sheet Data}\\ \text{December 31}\\ \begin{matrix} \text{ } & \text{2018} & \text{2017} & \text{Increase (I) or Decrease (D)}\\ \hline \text{Cash} & \text{$\$ 112,000$} & \text{$\$ 90,000$} & \text{$\$ 22,000\ (I)$}\\ \text{Accounts receivable} & \text{$46,000$} & \text{$54,000$} & \text{$8,000\ (D)$}\\ \text{Inventory} & \text{$85,000$} & \text{$60,000$} & \text{$25,000\ (I)$}\\ \text{Prepaid rent} & \text{$4,000$} & \text{$7,000$} & \text{$3,000\ (D)$}\\ \text{Accounts payable} & \text{$55,000$} & \text{$42,000$} & \text{$13,000\ (I)$}\\ \text{Income tax payable} & \text{$6,000$} & \text{$15,000$} & \text{$9,000\ (D)$}\\ \end{matrix}$$

Prepare the operating activities section of the statement of cash flows for Peach Computer using the indirect method.

Refer to the transactions between Ernie’s Electronics and Bert’s Bargain House recorded in the earlier exercise.

Required: Analyze each of the four transactions from the perspective of Bert’s Bargain House. Indicate in which section of the statement of cash flows each of these items would be reported for Bert’s Bargain House: operating activities (indirect method), investing activities, financing activities, or a separate noncash activities note.

Match (by letter) the following items with the description or example that best fits. Each letter is used only once.

$$\begin{matrix} \text{Terms}\\ \hline \text{\_\_\_\_\_ 1. Operatingactivities.}\\ \text{\_\_\_\_\_ 2. Investing activities.}\\ \text{\_\_\_\_\_ 3. Financingactivities.}\\ \text{\_\_\_\_\_ 4. Noncash activities.}\\ \text{\_\_\_\_\_ 5. Indirect method.}\\ \text{\_\_\_\_\_ 6. Direct method.}\\ \text{\_\_\_\_\_ 7. Depreciation expense.}\\ \text{\_\_\_\_\_ 8. Cash return on assets.}\\ \end{matrix}$$

$$\begin{matrix} \text{Descriptions}\\ \hline \text{a. Begins with net income and then lists adjustments to net income in order to arrive at operating cash flows.}\\ \text{b. Item included in net income, but excluded from net operating cash flows.}\\ \text{c. Net cash flows from operating activities divided by average total assets.}\\ \text{d. Cash transactions involving lenders and investors.}\\ \text{e. Cash transactions involving net income.}\\ \text{f. Cash transactions for the purchase and sale of long-term assets.}\\ \text{g. Purchase of long-term assets by issuing stock.}\\ \text{h. Shows the cash inflows and outflows from operations such as cash received from customers and cash paid for inventory, salaries, rent, interest, and taxes.}\\ \end{matrix}$$

Engineering Wonders reports net income of $60 million. Included in that number is building depreciation expense of$5 million and a gain on the sale of land of $1 million. Records reveal decreases in accounts receivable, accounts payable, and inventory of$2 million, $3 million, and$4 million, respectively. What are Engineering Wonders’ net cash flows from operating activities?

Based on the following information, compute cash flows from financing activities under GAAP.

Which of the following is a (are) permanent account(s)?

a. All income statement accounts
b. All balance sheet accounts and the Dividends account
c. The Retained Earnings account
d. The Dividend account

Power Drive Corporation designs and produces a line of golf equipment and golf apparel. Power Drive has 100,000 shares of common stock outstanding as of the beginning of 2012. Power Drive has the following transactions affecting stockholders’ equity in 2012. March 1 $~~~~~~~$ Issues 55,000 additional shares of $1 par value common stock for$52 per share. May 10 $~~~~~~~$Repurchases 5,000 shares of treasury stock for $55 per share. June 1$~~~~~~~$Declares a cash dividend of$1.50 per share to all stockholders of record on June 15. (Hint: Dividends are not paid on treasury stock.) July 1 $~~~~~~~$Pays the cash dividend declared on June 1. October 21 $~~~~~~~$ Reissues 2,500 shares of treasury stock purchased on May 10 for $60 per share.

Required: Record each of these transactions.

Suppose your company’s income statement reports $105 of net income, and its comparative balance sheet indicates the following.

Required:

1. Prepare the operating activities section of the statement of cash flows, using the indirect method.
2. Identify the most important cause of the difference between the company’s net income and net cash flow from operating activities.

Describe the types of items used to compute cash flows from operating activities under the two alternative methods of reporting.

Based on the following information, compute cash fl ows from investing activities under GAAP.

$$\begin{array}{lrlr} \text { Cash collections from customers } & \$ 800 & \text { Sale of investments } & 300 \\ \text { Purchase of used equipment } & 350 & \text { Dividends received } & 100 \\ \text { Depreciation expense } & 200 & \text { Interest received } & 200 \end{array}$$

Suppose your company sells goods for $300, of which$200 is received in cash and $100 is on account. The goods cost your company$125 in a previous period. Your company also recorded wages of $70, of which only$30 has been paid in cash.

Required:

1. Show the journal entries to record these transactions.
2. Calculate the amount that should be reported as net cash flow from operating activities.
3. Calculate the amount that should be reported net income?
4. Show how the indirect method would convert net income (requirement 3) to net cash flow from operating activities (requirement 2).
5. What general rules about converting net income to operating cash flows is revealed by your answer to requirement 4?