Cash Investments shortterm Accounts receivable Inventory Not

Cash Investments (short-term) Accounts receivable Inventory Notes receivable (long-term) Equipment Factory building Intangibles $22,000 Accounts payable $15,000 4,000 7,000 47,000 10,000 80,000 31,000 3,000 Accrued liabilities payable 3,000 Notes payable (short-term) 20,000 Notes payable (long-term) 1,000 Common stock Additional paid-in capital 50,000 90,000 Retained earnings 5,000 During the current year, the company had the following summarized activities a. Purchased short-term investments for $10,000 cash b. Lent $5,000 to a supplier who signed a two-year note c. Purchased equipment that cost $18,000; paid $5,000 cash and signed a one-year note for the balance d. Hired a new president at the end of the year. The contract was for $85,000 per year plus options to purchase company stock at a set price based on company performance e. Issued an additional 2,000 shares of $0.50 par value common stock for $11,000 cash. f. Borrowed $9,000 cash from a local bank, payable in three months g. Purchased a patent (an intangible asset) for $3,000 cash. h. Built an addition to the factory for $24,000; paid $8,000 in cash and signed a three-year note for the balance i. Returned defective equipment to the manufacturer, receiving a cash refund of $1,000 Required Using the events (a) through (i), indicate whether each is an investing (1) or financing (F) activity for the year and the direction of the effect on cash flows ( + for increase and- for decrease). If there is no effect on cash flows, select NE. Transaction Type of Activity Effect on Cash

Solution

Transaction

Type of Activity

Effect on Cash

a

N/A

(NE) : Since this is short term investment, there will be no change in Investing or Financing activities.

b

Financing

(-) : Cash paid for notes payable in two years time

c

Investing

(-) Equipment is a fixed asset, it will be treated as a part of investing activities

d

Operating

(NE) : President hired at the end of the year, so no impact on cash during the year

e

Financing

(+) : Cash received from the issue of shares, treated as financing activity

f

N/A

(NE) : Since this is a short term loan, there will be no change in Investing or Financing activities.

g

Investing

(-) Patent is an intangible asset, it will be treated as a part of investing activities

h

Investing

(-) Factory is a fixed asset, it will be treated as a part of investing activities

i

Investing

(+) : Cash received from manufacturer for the return of defective equipment.

Transaction	Type of Activity	Effect on Cash
a	N/A	(NE) : Since this is short term investment, there will be no change in Investing or Financing activities.
b	Financing	(-) : Cash paid for notes payable in two years time
c	Investing	(-) Equipment is a fixed asset, it will be treated as a part of investing activities
d	Operating	(NE) : President hired at the end of the year, so no impact on cash during the year
e	Financing	(+) : Cash received from the issue of shares, treated as financing activity
f	N/A	(NE) : Since this is a short term loan, there will be no change in Investing or Financing activities.
g	Investing	(-) Patent is an intangible asset, it will be treated as a part of investing activities
h	Investing	(-) Factory is a fixed asset, it will be treated as a part of investing activities
i	Investing	(+) : Cash received from manufacturer for the return of defective equipment.