Chapter 12, Problem 11E

To determine

Cash Flow Statement:

Cash flow statement is that statement in which, transaction related to cash are recorded. It is mandatory report and included in the financial statement of the company. It is divided into three parts operating activities, investing activity, and financial activity

Operating Activity:

Operating activity is the first part of the cash flow statement. The main focuses of the operating activity on the cash inflow and outflow from the selling goods, providing services and manufacturing. Long term capital and investing cost are not included in the operating activity.

Financial Activity:

Financial activity is the part of the cash flow statement. Financial activity involves the long term liability, borrowing and stockholder’s equity. All the changes in the long term liability, equity and borrowings reported in the financial statement.

Investing Activity:

Investing activity is the third part of the cash flow statement which gives the information related to the acquisition and disposal of the long term assets of the company such as land and building, investment and plant.

To prepare: Cash flow statement

Explanation of Solution

Cash flow statement	Amount($)	Amount($)
Cash flow from operating activities:
Net income	99,510
Adjustment for non cash expense
Add: Depreciation	58,600
Less: Gain on sale of the machinery	(2,000)
Adjustment for working capital change:
Add: Increase in working capital	(4,700)
Net cash flow from operating activities		151,410
Cash flow from investing activities
Cash received on sale of equipment	10,000
Cash paid for acquiring new equipment	(57,600)
Cash flow from investing activities		(47,600)
Cash flow from financing activities:
Cash from issuance of share	60,000
cash paid on retirement	(30,000)
Cash paid for dividend	(90,310)
Cash flow from financing activities:		(60,310)
Net increase in cash $\left(\text{A}\right)+\left(\text{B}\right)+\left(\text{C}\right)$		43,500
Cash and cash equivalent, December 31,2016		44,000
Cash and cash equivalent, December 31,2017		87,500

     Table (1)

Working note:

Calculate the working capital change

Particular	2017	2016	Increase/decrease
Accounting receivable	63,800	51,000	14,000
Inventory	63,800	86,500	(22,700)
Prepaid expenses	4,400	5,400	(1,000)
Increase(Decrease) in current assets(D)			(9,700)
account payable	25,000	30,000	5,000
Wages payable	6,000	15,000	(9,000)
Income tax payable	3,400	3,800	(400)
Increase(decrease) in current liabilities(E)			(14,400)
Increase (Decrease) in working capital$\left(\text{D}\right)-\left(\text{E}\right)$			4,700

     Table (2)

Calculate the cash received on sale of the equipment,

particular	Amount(S)
Accumulated depreciation 2016	9,000
Add: Depreciation for the year	58,600
Less: Accumulated depreciation	(27,000)
Depreciation on equipment sold	40,600
Original cost of the equipment sold	48,600
Less: Depreciation on equipment	(40,600)
Book value of the equipment sold	8,000
Add: Gain on sale	2,000
Cash received on sale of equipment	10,000

     Table (3)

Calculate the cash dividend paid,

  $\begin{array}{c}\text{Cash}\text{dividends}=\left(\begin{array}{l}\text{Retained}\text{earning}\text{opening}\text{balance}+\text{Net}\text{income}\\ -\text{Retained}\text{earining}\text{balance}\end{array}\right)\\ =\$24,100+\$99,510-\$33,300\\ =\$90,310\end{array}$

2.

To determine

Cash flow on total assets:

Cash flow on total assets ratio is that ratio through which company ability to meet its obligation can be seen whether company in the position to meet its obligation or not.

To determine:

Explanation of Solution

Explanation:

Given,

Cash flow from operation is $151,410.

Opening balance of the assets is $317,700.

Closing assets of the assets is $292,900.

Formula to calculate the cash flow on total assets,

  $\text{Cash}\text{flow}\text{on}\text{total}\text{assets}=\frac{\text{Cash}\text{flow}\text{from}\text{operatoion}}{\text{Averager}\text{total}\text{assets}}$

Substitute, $151,410 for the cash flow from operations and $305,300.

  $\begin{array}{c}\text{Cash}\text{flow}\text{on}\text{total}=\frac{\$151,410}{\$305,300}\\ =49.59\%\end{array}$

Working note:

Calculate average total assets,

  $\begin{array}{c}\text{Average}\text{total}\text{assets}=\frac{\text{Opening}\text{balance}+\text{Closing}\text{balance}}{2}\\ =\frac{\$317,700+\$292,900}{2}\\ =\$305,300\end{array}$

Hence, cash flow on assets ratio is 49.59%.