Three Types of Activities:

For each of the following transactions on the statement of cash flows, indicate whether it would appear in the Operating Activities section (O), in the Investing Activities section (I), or in the Financing Activities section (F). Assume the use of the direct method in the Operating Activities section.

1. Repayment of long-term debt

2. Purchase of equipment

3. Collection of customer's account

4. Issuance of common stock

5. Purchase of another company

6. Payment of dividends

7. Payment of income taxes

8. Sale of equipment

Direct versus Indirect Method

For each of the following items, indicate whether it would appear on a statement of cash flows prepared using the direct method (D) or the indirect method (I).

1. Net income

2. Increase in accounts receivable

3. Collections on accounts receivable

4. Payments on accounts payable

5. Decrease in accounts payable

6. Depreciation expense

7. Gain on early retirement of bonds

8. Cash sales

Direct Method

Fill in the blank for each of the following situations.

Balance Sheet Beginning Ending Income Statement

Cash Inflow

1. Accounts receivable $2,000 $5,000 Sales on account, $15,000
2. Prepaid insurance $4,000 $3,000 Insurance expense, $7,000
3. Income taxes payable $6,000 $9,000 Income tax expense, $20,000
4. Wages payable $5,000 $3,000 Wages expense, $25,000

Brief Indirect Method

For each of the following items, indicate whether it would be added to (A) or deducted from (D) net income to arrive at net cash flow provided by operating activities under the indirect method.

1. Increase in accounts receivable

2. Decrease in prepaid rent

3. Decrease in inventory

4. Decrease in accounts payable

5. Increase in income taxes payable

6. Depreciation expense

7. Gain on sale of equipment

8. Loss on early retirement of bonds