Question

The following events apply to Gulf Seafood for the 2018 fiscal year.

1. The company started when it acquired $60,000 cash by issuing common stock.

2. Purchased a new cooktop that cost $40,000 cash.

3. Earned $72.000 in cash revenue.

4. Paid $25,000 cash for salaries expense.

5. Adjusted the records to reflect the use of the cooktop. Purchased on January 1, 2018, the cooktop has an expected useful life of four years and an estimated salvage value of $4,000. Use straight-line depreciation. The adjusting entry was made as of December 31, 2018.

Required:

a. Record the above transactions in a horizontal statements model like the following one. (In the Cash Flow column, indicate whether the item is an operating activity (OA), an investing activity (IA), a financing activity (FA) and net change in cash (NC). The letters NA indicate that an element is not effected by the event. Enter any decreases to account balances and cash outflows with minus sign.)

Answer 1

Gulf Seafood cash flow for the 2018 fiscal year

Amount in $ Operating Investing Financing

Issuance of stock 60,000 NA NA FA

Purchase of new cooktop -40,000 NA IA NA

Cash revenue 72,000 OA NA NA

Cash salaries -25,000 OA NA NA

Depreciation of cooktop 9,000 OA NA NA

Step-by-step explanation:

The cash flow statement categories the company's transactions in a financial period into 3 groups; these are operating, investing and financing.

The net profit/loss, depreciation, changes in current assets (other than cash) and liabilities are considered as operating activities including income taxes.

The sale of assets, interest received, purchase of investments are examples of investing activities while the issuance of stocks, debt principal deduction (loan settlement), issuance of debt securities etc are examples of financing activities.

Depreciation = (cost - residual value)/estimated useful life

= (40000 - 4000)/4

= $9,000

This depreciation is a non-cash item that may be added back to the net income in the operating segment of the cash flow.