Chapter 12, Problem 1GLP

To determine

Statement of cash flows:

The statement of cash flow is a financial statement, which provides a summary of actual or anticipated cash inflow and cash outflow in a firm over an accounting period. It determines the net changes in cash through reporting the sources and uses of cash due to operating, investing, and financial activities of a company.

Journal entry:

Journal is the primary record of the business transaction in chronological (date wise) order. Journal entry contains two effects, one is debit and the other is credit, under the double entry book keeping system.

To prepare: Summary journal entries reflecting changes in consecutive trial balances.

Explanation of Solution

Prepare the journal entries as shown below.

a.

Retirement of the notes payable:

Date	Particulars	L/F	Amount ($)	Amount ($)
	Notes payable		30,000
	Cash			30,000
	(To record the retirement of notes payable)

Table (1)

• Notes payable account is a liability account. Since notes payable has been retired it decreases the liability of the company. So, the notes payable account is debited.

• Cash is an assets account of the company. Here, cash has been paid to retire the notes payable which decrease the assets of the company. So, the cash account is credited.

b.

Payment of dividend:

Date	Particulars	L/F	Amount ($)	Amount ($)
	Dividend		90,310
	Cash			90,310
	(To record the payment of dividend)

Table (2)

• Dividend is an expense account to a company. Here, dividend is being paid which increases the expense for the company. So, dividend expense account is credited.

• Cash is an asset to a company. Here, cash has been paid for the payment of dividend which decreases the assets of the company. So, cash account is credited.

c.

Purchase of equipment:

Date	Particulars	L/F	Amount ($)	Amount ($)
	Equipment		48,600
	Cash			48,600
	(To record the purchase of equipment)

Table (3)

• Equipment account is an asset account. Here, assets have been purchased which increases the assets of the company. So, equipment account is debited.

• Cash is an asset account. Here, cash has been paid to acquire equipment, which decreases the assets of the company. So, cash account is credited

d.

Sale of the equipment:

Date	Particulars	L/F	Amount ($)	Amount ($)
	Cash		50,600
	Profit and loss			2,000
	Equipment			48,600
	(To record the sale of the equipment)

Table (4)

• Cash account is an asset account. Here, cash has been received by the company which increases the assets of the company. So, cash account is debited.

• Profit and loss account is a revenue account. Here, gain on the sale of equipment is revenue earned by the company. So, the profit and loss account is credited.

e.

Increase in the accounts receivable:

Date	Particulars	L/F	Amount ($)	Amount ($)
	Account receivable		14,000
	Sales			14,000
	(to record the account receivable)

Table (5)

• Accounts receivable account is an assets account. Here, accounts receivable increases on the sale on credit. So, accounts receivable account is debited.

• Sales account is a revenue account. Here, sales generate revenue for the company. So, sales account is credited.

Decrease in the prepaid expenses:

Date	Particulars	L/F	Amount ($)	Amount ($)
	Expense		1,000
	Prepaid expense			1,000
	(To record the prepaid expenses)

Table (6)

• Expenses being an expense account it increases and equity decreases. Hence, expense account is debited.

• Prepaid expense is an assets account. Here, the prepaid expense decreases so, prepaid expense account is credited.

Decrease in the accounts payable:

Date	Particulars	L/F	Amount ($)	Amount ($)
	Accounts payable		5,000
	Cash			5,000
	(To record the account payable)

Table (7)

• Accounts payable is a liability account. Since, account payable reduces the equity of the company, so it must be debited.

• Cash is an assets account. Since, the cash of the company is reducing, so, it must be credited.

Decrease in the wages payable:

Date	Particulars	L/F	Amount ($)	Amount ($)
	Wages payable		9,000
	Cash			9,000
	(To record the wages payable)

Table (8)

• Wages payable is a liability account. Since, wages payable reduces the equity of the company, so wages payable is debited.

• Cash is an asset account. Since, the cash of the company is reducing, so, the cash account is credited.

Decrease in the income tax payable:

Date	Particulars	L/F	Amount ($)	Amount ($)
	Income tax payable		400
	Cash			400
	(To record the income tax payable)

Table (9)

• Income tax payable is a liability account. Since, income tax payable is decreasing. Hence, the income tax payable account is debited.

• Cash is an asset account. Since, the cash of the company is reducing, so, cash account is credited.

f.

Sale of the inventory on credit:

Date	Particulars	L/F	Amount ($)	Amount ($)
	Sundry debtor		22,700
	Inventory account			22,700
	(To record the sale of the inventory)

Table (10)

• Sundry debtor account is an asset account. Here, debtors of the company are increasing. So, the sundry debtor account is debited.

• Inventory is an asset account. Here, the assets of the company are decreasing which decreases the assets of the company. So, the inventory account is credited.

Now, prepare the cash flow statement using the direct method as shown below.

Particulars	Amount ($)	Amount ($)
Cash flow from operating activities
Cash collected from customers	664,000
Cash paid to suppliers	(393,300)
Cash paid for other expense	(75,000)
Cash paid for income tax	(44,290)
Cash flow from operating activities (A)		151,410
Cash flow from investing activities:
Cash received on sale of the equipment	10,000
Cash paid for new equipment	(57,600)
Cash flow from investing activities (B)		(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 (C)		(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, 2014		44,000
Cash and cash equivalent, December 31, 2015		87,500

Table (11)

Working notes:

1. Calculate the cash collected from the customer.

$\begin{array}{c}\text{Cash}\text{collected}\text{from}\text{customer}=\text{Sales}\text{revenue}-\text{Increase}\text{in}\text{accounts}\text{receivable}\\ =\text{\$678,000}-\text{\$14,000}\\ =\text{\$664,000}\end{array}$

2. Calculate the cash paid to supplies.

$\begin{array}{c}\text{Cash}\text{paid}\text{to}\text{supplies}=\left(\begin{array}{l}\text{Cost}\text{of}\text{goods}\text{sold}+\text{Decrease}\text{in}\text{accounts}\text{payable}\\ -\text{Decrease}\text{in}\text{inventory}\end{array}\right)\\ =\$411,000+\$5,000-\$22,700\\ =\$393,300\end{array}$

3. Calculate the cash paid for other expenses.

$\begin{array}{c}\text{Cash}\text{paid}\text{other}\text{expenses}=\left(\begin{array}{l}\text{Other}\text{expense}-\text{Decrease}\text{in}\text{prepaid}\text{expense}\\ -\text{Decrease}\text{in}\text{wages}\text{payable}\end{array}\right)\\ =\text{\$67,000}-\text{\$1,000}-\$9,000\\ =\text{\$57,000}\end{array}$

4. Calculate the cash received on the sale of equipment.

Particulars	Amount ($)
Accumulated depreciation 2014	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 (12)

5. Calculate the cash dividend paid.

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

Now, prepare the cash flow statement using the indirect method as shown below.

Particulars	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, 2014		44,000
Cash and cash equivalent, December 31, 2015		87,500

Table (13)

Working note:

1. Calculate the working capital change.

Particulars	2015	2014	Increase/ Decrease
Accounts 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)
Accounts 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 (D – E)			4,700

Table (14)

2. Calculate the cash received on the sale of equipment.

Particulars	Amount ($)
Accumulated depreciation 2014	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 (15)

Working note:

Calculate the cash dividend paid.

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

Reconciliation of the cash flow using the direct and indirect method:

Particulars	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 statement (Direct method)
Cash flow from operating activities:
Cash collected from customers	664,000
Cash paid to suppliers	(393,300)
Cash paid for other expense	(75,000)
Cash paid for income tax	(44,290)
Cash flow from operating activities		151,410

Table (16)

Conclusion

Hence, the journal entries reflecting changes in consecutive trial balances are prepared as above.