Problem Solving Survival Guide to accompany Financial Accounting, 8th Edition

TIPS ON CHAPTER TOPICS

TIP: Every transaction affecting the Cash account is to be reflected either as an inflow (receipt) or outflow (payment) on the statement of cash flows. Furthermore, the receipts and payments are to be classified by activity. The three activity classifications are: (1) operating, (2) investing, and (3) financing.

TIP: In determining if a cash transaction is related to an operating activity, investing activity, or financing activity, first see if it meets the definition of investing activities. If not, see if it meets the definition of financing activities. If not, then it is an operating activity. (Refer to Illustration 13-1 for these definitions and examples.)

TIP: In determining if a cash transaction is an operating activity, investing activity, or financing activity, it is usually helpful to reconstruct the journal entry used to record the transaction. The following observations are also helpful:

1. The journal entry to record a transaction that is an investing activity which results in a cash flow will generally involve: (1) Cash and (2) an asset account other than Cash, such as Investment (short-term or long-term), Land, Building, Equipment, Patent, Franchise, etc.
2. The journal entry to record a transaction that is a financing activity which results in a cash flow will generally involve: (1) Cash and (2) a liability account or an owners' equity account such as Bonds Payable, Notes Payable, Dividends Payable, Common Stock, Paid-in Capital in Excess of Par ...