Impact of Transactions Involving Operating Assets in statement of Cash Flows

From the following list, identify each item as operating (O), investing (I), financing (F), or not separately reported on the statement of cash flows (N).

________ Purchase of land

________ Proceeds from sale of land

________ Purchase of equipment

________ Depreciation expense

________ Proceeds from sale of equipment

________ Loss on sale of equipment

Impact of Transactions Involving Intangible Assets in statement of Cash Flows

From the following list, identify each item as operating (O), investing (I), financing (F), or not separately reported on the statement of cash flows (N).

________ Cost incurred to acquire copyright

________ Proceeds from sale of patent

________ Gain on sale of patent

________ Research and development costs

________ Amortization of patent

Capital versus Revenue Expenditures

On January 1, 2010, Jose Company purchased a building for $200,000 and a delivery truck for

$20,000. The following expenditures have been incurred during 2012:

• The building was painted at a cost of $5,000.

• To prevent leaking, new windows were installed in the building at a cost of $10,000.

• To improve production, a new conveyor system was installed at a cost of $40,000.

• The delivery truck was repainted with a new company logo at a cost of $1,000.

• To allow better handling of large loads, a hydraulic lift system was installed on the truck at acost of $5,000.

• The truck’s engine was overhauled at a cost of $4,000.

Book versus Tax Depreciation

Griffith Delivery Service purchased a delivery truck for $33,600. The truck has an estimated useful life of six years and no salvage value. For purposes of preparing financial statements, Griffith isplanning to use straight-line depreciation. For tax purposes, Griffith follows MACRS. Depreciation expense using MACRS is $6,720 in Year 1, $10,750 in Year 2, $6,450 in Year 3, $3,870 ineach of Years 4 and 5, and $1,940 in Year 6.

1. What is the difference between straight-line and MACRS depreciation expense for each of the six years?

2. Griffith’s president has asked why you use one method for the books and another for tax calculations. ‘‘Can you do this? Is it legal? Don’t we take the same total depreciation either way?’’ he asked. Write a brief memo answering his questions and explaining the benefits of using two methods for depreciation.

Problem 8-4 Depreciation and Cash Flow

O’hare Company’s only asset as of January 1, 2012, was a limousine. During 2012, only thefollowing three transactions occurred:

Services of $100,000 were provided on account.

All accounts receivable were collected.

Depreciation on the limousine was $15,000.

Required

1. Develop an income statement for O’hare for 2012.

2. Determine the amount of the net cash inflow for O’hare for 2012.

3. Explain why O’hare’s net income does not equal net cash inflow.

4. If O’hare developed a cash flow statement for 2012 using the indirect method, what amountwould appear in the category titled Cash Flow from Operating Activities?