I'm using a textbook called 'Financial & Managerial Accounting: Information for Decisions by John Wild & Ken Shaw (8th edition)'. I'm on Chapter #1 - Accounting in Business.
I posted the 1-6 Need to Know problem.
I don't understand how to prepare the Statement of Cash Flows, which is #5 of this problem. I understand that the first step is to understand that since the business is just starting, the starting balance for cash is $0 and thus, the second to last line of the Statement of Cash Flows should read 'Cash Balance, August 1... $0.' The second step is to take the balance of the cash account from the newly prepared Balance Sheet (#4). That balance is the ending balance of the cash account ($2,330) and thus, the last line of the Statement of Cash Flows should read 'Cash Balance, August 31... $2,330.'
The first portion of the Statement of Cash Flows is the Operating Cash Flow, which includes cash received from clients/customers and cash paid for supplies, rent, and employee salaries. I thought cash received from clients/customers included the $825 from transaction E., the $100 from transaction G., and the $930 from transaction I. and that the total for cash received from clients/customers was $1,855. I was right. However, I thought the cash paid out for supplies, rent, and employees salaries included $500 from transaction C. and the $125 from transaction H and that the total came to $625. I was wrong. According to the textbook, the correct answer for cash paid out for supplies, rent, and employees salaries is $1,025.
I don't understand why the $400 paid for in transaction J. is considered 'cash paid for supplies, rent, and employee salaries'. I would think that equipment for the business would be considered Investing Cash Flow. Or does the textbook expect us to know that this particular equipment is supposed to be used for less than one year and thus is not a long term asset?
Here's my second question. The second portion of the Statement of Cash Flows is the Investing Cash Flow, which includes cash involved in the buying and selling of assets held for long term use. The business spent $600 on furniture. That's transaction B. Why is this transaction considered Investing Cash Flow? Is the furniture in transaction B. going to be used for more than a year and is therefore a long term asset?
Please help. Thanks.