Exercise-1 (Operating, investing and

financing activities and their effect)

Posted in: Statement of cash flows
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The Delta company uses indirect method to prepare its statement of cash flows. The list of various
activities performed by the company during the year 2014 is given below:

1. Purchase of treasury stock

2. Purchase of available for sale investment
3. Sale of equipment at a loss
4. Increase in accounts payable
5. Retirement of bonds
6. Issuance of bonds
7. Decrease in accounts payable
8. Increase in inventory
9. Loan from bank by signing a note
10. Increase in accounts receivable
11. Purchase of equipment by issuing a note
12. Purchase of land and building.
13. Decrease in accounts receivable.
14. Payment of dividends.
15. Issuance of stock for cash.
16. Sale of land at a gain.
17. Depreciation expense.
18. Sale of land at book value.

Required: Explain the effect of each activity on the statement of cash flows of the Delta company for
the year 2014.

Solution:
1. Purchase of treasury stock is reported as cash outflow in financing activities section.
2. Purchase of available for sale investment is reported as cash outflow in investing activities
section.
3. Sale of equipment at a loss will affect two sections – operating activities section and investing
activities section. As the company uses indirect method, the loss on sale of equipment will be
added back to the net operating income in the operating activities section and the total proceeds
realized from the sale of equipment will be reported as cash inflow in investing activities section.
4. Increase in accounts payable is added to net income in the operating activities section to
convert accrual based net income to net cash provided by operating activities.
5. The retirement of bonds is a financing activity and reported as cash outflow in financing
activities section.
6. The issuance of bonds brings cash in the company. It is also a financing activity and reported
as cash inflow in financing activities section.

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7. Decrease in accounts payable is deducted from net income in the operating activities section
to convert accrual based net income to net cash provided by operating activities.
8. Increase in inventory is deducted from net income in operating activities section.
9. Loan from bank by signing a note is a financing activity. It is reported as inflow of cash
in financing activities section of statement of cash flows.
10. Increase in accounts receivable is deducted from net income in operating activities section.
11. Purchase of equipment by issuing a note is a non-cash investing activity. See non-cash
investing and financing activities and their disclosure.
12. Purchase of land and building are investing activities and are disclosed as cash outflows in
investing activities section.
13. Decrease in accounts receivable is added to net income in the operating activities section.
14. Payment of dividend is a financing activity and the outflow of cash resulting from such activity is
reported in financing activities section of the statement of cash flows.
15. Issuance of stock is a financing activity, the resulting cash inflow is reported in financing
activities section.
16. Sale of land at a gain is an investing activity. The total sale proceeds are reported under
investing activities section. The amount of gain is deducted from net income in the operating
activities section.
17. Depreciation expenses are non-cash expenses and are added back to net operating income in
operating activities section to convert accrual based net income to net cash provided by
operating activities.
18. Sale of land at book value is an investing activity, the inflow of cash resulting from the sale of
land is reported in investing activities section.

19. T-Accounts, Journal Entry and Trial Balance Question

20. by Jane
(Philippines)

21. Q: Juan de la Cruz began professional practice as a system analyst on July 1. He

plans to prepare a monthly financial statement. During July, the owner completed
these transactions (PHP = Philippine Peso, currency of Philippines):

22.
July 1. Owner invested PHp 500,000 cash along with computer equipment that had a market
value of php. 120,000 two years ago but was now worth Php. 100,000 only.
July 2. Paid php. 15,000 cash for the rent of office space for the month.
July 4. Purchased php. 12,000 of additional equipment on credit (due within 30 days).
July 8. Completed awork for a client and immediately collected the php. 32,000 cash.
July 10. Completed work for a client and sent a bill for php. 27,000 to be paid within 30 days.
July 12. Purchased additional equipment for php. 8,000 in cash.
July 15. Paid an assistant php. 6,200 cash as wages for 15 days.
July 18. Collected php. 15,000 on the amount owed by the client.
July 25. Paid php. 12,000 cash to settle the liability on the equipment purchased.
July 28. Owner withdrew php. 500 cash for personal use.
July 30. Completed work for another client who paid only php. 40,000 for 50% of the system
design.
July 31. Paid salary of assistant php. 700.
July 31. Received PLDT bill, php. 1,800 and Meralco bill php. 3,800.

Required:
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 Prepare the journal entries, T accounts and trial balance for this business.

A:
23. This is a really good question to practice.

Journal entries for the above transactions:

July 1 Dr Cash 500,000

Dr Computer Eqpt 100,000
Cr Capital 600,000
Owner started business with cash and computer Eqpt.

2 Dr Rent Exp 15,000

Cr Cash 15,000
Paid rent of office for the month of July.

4 Dr Equipment 12,000
Cr Creditors 12,000
Equipment purchased for business use.

8 Dr Cash 32,000
Cr Services rendered (income) 32,000
Services rendered for a client.

10 Dr Debtors 27,000
Cr Services rendered (income) 27,000
Services rendered for a client.

12 Dr Equipment 8,000
Cr Cash 8,000
Additional equipment purchased.

15 Dr Salaries & Wages 6,200

Cr Cash 6,200
Paid wages to assistant for 15 days.

18 Dr Cash 15,000
Cr Debtors 15,000
Received cash from debtor.

25 Dr Creditors 12,000
Cr Cash 12,000
Creditors of Eqpt purchased, settled.

28 Dr Drawings 500
Cr Cash 500
Owner withdrew cash for personal use.

30 Dr Cash 40,000
Dr. Debtors 40,000
Cr Services rendered (income) 80,000
50% amount received by a client on a/o work completed.

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31 Dr Salaries & Wages 700
Cr Cash 700
Paid salary to the assistant.

31 Dr Utilities Exp (PLDT) 1,800

Dr Utilities Exp (Meralco) 3,800
Cr Creditors 5,600
PLDT and Meralco have been assumed to be the utility companies.

Note: In this example we have combined salaries and wages into one account, but sometimes in real
life these are kept separate - one account for wages and another account for salaries.

T-ACCOUNTS:

24.

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25.

26.

27.

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 28.

29.

30.
31.

32. TRIAL BALANCE:

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 33.

Company Trial Balance and Financial

Statements Question
by Anonymous

The trial balance of Palicio Security Services Inc. as of January 1, 2016 had the following
normal balances:

Cash 74,210
Accounts receivable 13,500
Supplies 200
Prepaid rent 3,200
Merchandise inventory (24 @ $265; 1 @ $260) 6,620
Land 4000
Accounts payable 1,950
Unearned revenue 980
Salaries payable 1,000
Common stock 50,000
Retained earnings 47,800

The following transactions took place during 2016 for Palicio Security Services:
1. Paid the salaries payable from 2015.
2. On March 1, 2016, Palicio established a $100 petty cash fund to handle small
expenditures.
3. Paid $4,800 on May 1, 2016, for one year's lease on the company van in advance.
4. Paid $7,200 on May 2,2016 for one year's office rent in advance.
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5. Purchased $400 of supplies on account.
6. Purchased 100 alarm systems for $28,000 cash during the year.
7. Sold 102 alarm systems for $57,120. All sales were on account.
(Compute cost of goods sold using the FIFO cost flow method)
8. Paid $2,100 on accounts payable during the year.
9. Replenished the petty cash fund on August 1. At this time, the petty cash fund had only $7
of currency left. It contained the following receipts: office supplies expense $23, cutting
grass $55, and miscellaneous $14.
10. Billed $52,000 of monitoring services for the year.
11. Paid installers and other employees a total of $25,000 cash for salaries.
12. Collected $89,300 of accounts receivable during the year.
13. Paid $3,600 of advertising expense during the year.
14. Paid $2,500 of utilities expense for the year.
15. Paid a dividend of $10,000 to the shareholders.

Required:
1. Prepare the trial balance as at Dec 31, 2016 for Palicio Security Services Inc.
2. Prepare the income statement, statement of changes in equity and balance sheet for
Palicio Security Services Inc.

A:
This is actually a pretty tricky and advanced accounting question. I would recommend not to try it
unless you have a pretty good understanding of the following topics (click for a tutorial on each):

 The Trial Balance,

 Financial Statements and

 Inventory (including the FIFO Method and Cost of Goods Sold).

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 Additionally, this question also deals with prepaid
expensesand income received in advance , which are concepts I don’t go into detail about on this
website (I only cover these topics in detail in my basic accounting books ).

Here are some brief explanations though: Prepaid expenses are expenses you paid too early.
Because it is paid too early it is as if you are owed the amount you paid, and the prepaid expense
essentially is a debtor/receivable (an asset account).

In a similar way, income earned in advance means you have been paid money before delivering
the services/products, and so it is as if you owe this amount. Thus, income earned in advance is
a creditor/payable .

Note also that in this exercise we are dealing with a company or corporation , not a simple sole
proprietor. With a corporation there are some new terms and concepts.

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First of all there are many owners in a corporation and these owners are called shareholders .

Also, each of the shareholders owns shares in the corporation, which is also known as common
stock .

Finally, instead of “drawings," we have dividends that are paid to all the shareholders from the
accumulated profits (AKA retained earnings ).

Okay, so now that we’ve cleared up all those terms, here’s the solutions, starting with the trial
balance:

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Notes:

** Cash includes $100 petty cash. Calculation of cash balance:

74,210 - 1,000 - 4,800 - 7,200 - 28,000 - 2,100 - (100 - 7) - 25,000 + 89,300 - 3,600 - 2,500 - 10,000
= 79,217

The opening balance of prepaid rent ($3,200) has been expensed out during 2016 as we have
assumed this rent (that was paid the previous year) applies to the 2016 year. This is a likely
assumption as there was a new prepaid rent cash payment on 2 May, 2016.

It is not stated in the question whether the unearned revenue of $980 at the beginning of 2016 was
actually earned during the year. In this solution we have assumed that the unearned revenue still
remains unearned at the end of 2016. However, it is quite acceptable to treat this as having been
earned during 2016. If treating it as earned during 2016 one would add $980 to revenue and
remove the unearned revenue account ($980 - $980).

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Calculation of Cost of Sales and Closing Inventory (FIFO Basis):

Opening Balance of Merchandise Inv. (24 Units @ $265 + 1 Unit @ $260) $6,620
Purchased during the year 100 Units @ $280 $28,000
Total available for sale 124 + 1 Units (125 Units) $34,620
Sold*(Cost of Sales) 102 Units $28,180
Closing Balance of Merchandise Inv. 23 Units @ $280 $6,440

*Cost of Sales 102 Units (24 Units @ $265) + (1 Unit @ $260) + (77 Units @ $280) = $28,180

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34.

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