Chapter 12, Problem 1GLP

To determine

Cash Flow Statement:

Cash flow statement gives the information related to the cash inflow and outflow of the company. It gives the information cash inflow and out flow from the operating, investing and financing activities.

Journal Entries:

Adjusting entries are those entries which are made at the end of the period to follow the matching the principal concept of the account.

To prepare: Journal ledger assignment

Explanation of Solution

a.

Retirement of the notes payable

Date	Account title and explanation	Post ref.	Amount ($)	Amount ($)
	Notes payable		30,000
	Cash			30,000
	(To record the retirement of notes payable)

Table(1)

• Notes payable account is the liability account. Here, notes payable has been retired which decreases the liability of the company. So, debit the notes payable account.
• Cash is the assets account of the company. Here, cash has been paid to retire the notes payable which decrease the assets of the company. So, credit the cash account.

b.

Payment of the dividend

Date	Account title and explanation	Post ref.	Amount ($)	Amount ($)
	Dividend		90,310
	Cash			90,310
	(To record the payment of the dividend)

Table(2)

• Dividend is the expense account for the company. Here, dividend is being paid which increase the expense for the company. So, credit the dividend expense account.
• Cash is the assets account of the company. Here, cash has been paid for the payment of the dividend which decrease the assets of the company. So, credit the cash account.

c.

Purchase of the equipment

Date	Account title and explanation	port ref.	Amount ($)	Amount ($)
	Equipment		48,600
	Cash			48,600
	(to record the purchase of the equipment)

Table(3)

• Equipment account is the assets account. Here, assets have been purchased which increase the assets of the company. So, debit the equipment assets account.
• Cash is the assets account. Here cash has been paid to acquire the equipment assets which decrease the assets of the company. So, credit the cash account.

d.

Sale of the equipment

Date	Account title and explanation	port ref.	Amount ($)	Amount ($)
	Cash		50,600
	Profit & loss			2,000
	Equipment			48,600
	(to record the sale of the equipment)

Table(4)

• Cash account is the asset account. Here, cash has been received by the company which increases the assets of the company. So, debit the cash account.
• Profit & loss account is the revenue account. Here, gain of on sale of the equipment is the revenue. So, credit the profit and loss account.

e.

Increase in the account receivable

Date	Account title and explanation	port ref.	Amount ($)	Amount ($)
	Account receivable		14,000
	Sales			14,000
	(to record the account receivable)

Table(5)

• Account receivable account is the assets account. Here, account receivable is increase by sale on credit. So debit the account receivable account.
• Sales account is the revenue account. Here, sales generate revenue for the company. So, credit the sale account.

Decrease in the prepaid expenses

Date	Account title and explanation	port ref.	Amount ($)	Amount ($)
	Expense		1,000
	Prepaid expense			1,000
	(to record the prepaid expenses)

Table(6)

• Expense is the expense account. Since expense is increasing it reduces the equity. Hence, debit expense account.
• Prepaid expense is the assets account. Here the prepaid expense is reducing. So, credit the prepaid expense account.

Decrease in the account payable

Date	Account title and explanation	port ref.	Amount ($)	Amount ($)
	Account payable		5,000
	Cash			5,000
	(to record the account payable)

Table(7)

• Account payable is the liability account. Since account payable reduces the equity of the company. Hence, debit the account payable.
• Cash is the assets account. Since, the cash of the company is reducing. Hence, credit the cash account.

Decrease in the wages payable

Date	Account title and explanation	port ref.	Amount ($)	Amount ($)
	Wages payable		9,000
	Cash			9,000
	(to record the wages payable)

Table(8)

• Wages payable is the liability account. Since wages payable reduces the equity of the company. Hence, debit the wages payable.
• Cash is the assets account. Since, the cash of the company is reducing. Hence, credit the cash account.

Decrease in the income tax payable

Date	Account title and explanation	port ref.	Amount ($)	Amount ($)
	Income tax payable		400
	Cash			400
	(to record the income tax payable)

Table(9)

• Income tax payable is the liability account. Since, income tax payable is decreasing. Hence, debit the income tax payable account.
• Cash is the assets account. Since, the cash of the company is reducing. Hence, credit the cash account.

f.

Sale of the inventory on credit

Date	Account title and explanation	port ref.	Amount ($)	Amount ($)
	Sundry debtor		22,700
	Inventory account			22,700
	(to record the sale of the inventory)

Table(10)

• Sundry debtor account is the assets account. Here, debtor of the company is increasing which increase the assets of the company. So, debit the sundry debtor assets account.
• Inventory is the assets account. Here, the assets of the company are decreasing which decrease the assets of the company. So, credit the inventory account.

Cash flow statement (Direct method)

Cash flow statement	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 31,2016		44,000
Cash and cash equivalent, December 31,2017		87,500

Table(11)

Working notes:

Calculate the cash collected from the customer,

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

Calculate the cash paid to supplies,

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

Calculate the cash paid for other expenses,

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

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(12)

Calculate the cash dividend paid:

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

Cash flow statement (indirect method)

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(13)

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(14)

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(15)

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 from direct and indirect method

Cash flow statement(Indirect method)	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)