Chapter 12, Problem 20AP

a.

To determine

Determine the amount of cash flow for each item and indicate whether the item should appear in the operating, investing, or financing activities section of a statement of cash flows and identify the item that do not affect the cash flow statement.

Explanation of Solution

Statement of cash flows:

Statement of cash flows is one among the financial statement of a Company statement that

Shows aggregate data of all cash inflows and cash outflows that is received and paid by the Company from its ongoing business operations

Operating activities:

Operating activities refer to the normal activities of a company to carry out the business. The examples for operating activities are purchase of inventory, payment of salary, sales, and others.

Investing activities:

Investing activities refer to the activities carried out by a company for acquisition of long term assets. The examples for investing activities are purchase of equipment, long term investment, sale of land, and others.

Financing activities:

Financing activities refer to the activities carried out by a company to mobilize funds to carry out the business activities. The examples for financing activities are purchase of bonds, issuance of common shares, and others.

Reconciliation of noncash current and current liability amounts:

1.

Reconciliation of Accounts Receivable Account	Amount ($)
Beginning balance	$128,000
Increase due to revenue recognized on account	$548,000
Decrease due to cash collections from customers	($586,000)
Ending balance	$90,000

Table (1)

To balance Accounts Receivable, the decrease due to cash collections from customers must be $586,000. And it appears in the operating activities section of the cash flow statement.

2.

Reconciliation of Salaries Payable Account	Amount ($)
Beginning balance	$16,000
Increase due to recognizing salaries expense on account	$232,000
Decrease due to cash settlements of salaries payable	($240,000)
Ending balance	$8,000

Table (2)

To balance salaries payable, the amount of the decrease due to cash settlements of salaries payable (cash paid for salaries expense) must be $240,000. And it appears in the operating activities section of the cash flow statement.

3.

Reconciliation of Other Operating Expenses Payable	Amount ($)
Beginning balance	$16,000
Increase due to recognizing other operating expenses on account	$236,000
Decrease due to cash settlements of other operating expenses payable	($242,000)
Ending balance	$10,000

Table (3)

To balance other operating expenses payable, the amount of the decrease due to cash settlements of other operating expenses payable must be $242,000. And it appears in the operating activities section of the cash flow statement.

4.

Cash flow is not affected by the depreciation expense. Therefore, it is not reported on the statement of cash flows under the direct method.

5.

Reconciliation of Equipment Account	Amount ($)
Beginning balance	$44,000
Increase due to purchasing equipment	$12,000
Decrease due to selling equipment	$0
Ending balance	$56,000

Table (4)

To balance the equipment, the increase due to purchasing equipment must be $12,000. And it appears in the investing activities section of the cash flow statement. In the absence of information to the contrary, assume cash was used to purchase the equipment.

6.

Reconciliation of Notes Payable Account	Amount ($)
Beginning balance	$36,000
Increase due to issuing notes payable	$8,000
Decrease due to cash settlements of notes payable	$0
Ending balance	$44,000

Table (5)

In order to balance notes payable account, the increase due to issuing notes payable must be $ 8,000. And it appears in the financing activities section of the cash flow statement. In the absence of information to the contrary, assume cash was obtained when the note was issued.

7.

Reconciliation of Interest Payable Account	Amount ($)
Beginning balance	$8,400
Increase due to recognizing accrued interest expense	$4,600
Decrease due to cash settlements of interest payable	($5,500)
Ending balance	$7,500

Table (6)

To balance interest payable, the amount of the decrease due to cash settlements of interest payable (cash paid for interest expense) must be $5,500. And it appears in the operating activities section of the cash flow statement.

8.

Reconciliation of Inventory	Amount ($)
Beginning balance	$22,000
Increase due to inventory purchases	$91,000
Decrease due to recognizing cost of goods sold	($83,600)
Ending balance	$29,400

Table (7)

To balance inventory, the increase due to inventory purchases must be $91,000. Inventory purchases determined above equals the increase due to inventory purchases used in the reconciliation of Accounts Payable below.

Reconciliation of Accounts Payable	Amount ($)
Beginning balance	$8,000
Increase due to inventory purchases (Refer table 7)	$91,000
Decrease due to cash settlements accounts payable	($92,600)
Ending balance	$6,400

Table (8)

To balance accounts payable, the decrease due to cash settlements of accounts payable (cash paid to purchase inventory must be $92,600. And it appears in the operating activities section of the cash flow statement.

9.

Reconciliation of Notes Receivable	Amount ($)
Beginning balance	$60,000
Increase due to loans to employee	$40,000
Decrease due to cash collections from employee	$0
Ending balance	$100,000

Table (9)

In order to balance the notes receivable, the increase due to loans to employee must be $40,000. And it appears in the investing activities section of the cash flow statement. In the absence of information to the contrary, assume cash was loaned to employees.

10.

Reconciliation of Common Stock Account	Amount ($)
Beginning balance	$120,000
Increase due to issuing common stock	$40,000
Ending balance	$160,000

Table (10)

To balance common stock, the increase due to issuing common stock has to be $40,000. And it appears in the financing activities section of the cash flow statement.

11.

Reconciliation of Land Account	Amount ($)
Beginning Balance	$24,000
Increase due to purchasing land	$0
Decrease due to selling land	($10,000)
Ending Balance	$14,000

Table (11)

To balance land, the increase due to purchase of land must be $0. And it appears in the investing activities section of the cash flow statement. The gain is not shown in the operating activities section of the statement of cash flows under the direct method.

12.

Reconciliation of Taxes Payable Account	Amount ($)
Beginning balance	$2,400
Increase due to recognizing accrued tax expense	$6,600
Decrease due to cash settlements of taxes payable	($6,800)
Ending balance	$2,200

Table (12)

To balance taxes payable account, the decrease due to cash settlements of taxes payable must be $6,800. And it appears in the operating activities section of the cash flow statement.

13.

Reconciliation of Investments Account	Amount ($)
Beginning balance	$20,000
Increase due to purchasing investments	$50,000
Decrease due to selling investments	($10,000)
Ending balance	$60,000

Table (13)

Investments costing 10,000 were sold for $22,000. And it appears in the investing activities section of the cash flow statement. The loss is not shown in the operating activities section of the statement of cash flows under the direct method.

b.

To determine

Prepare a statement of cash flows.

Explanation of Solution

Statement of cash flows:

Statement of cash flows is one among the financial statement of a Company statement that

Shows aggregate data of all cash inflows and cash outflows that is received and paid by the Company from its ongoing business operations

The statement of cash flows is prepared as follows:

Company Y
Statement of Cash Flows
For the Year Ended December 31, Year 1
Cash Flows From Operating Activities:	Amount	Amount
Cash Receipts from:
Sales	$586,000
Total Cash Inflows		$586,000
Cash Payments for:
Inventory purchased ( Refer table 8)	($92,600)
Salaries ( Refer table 2)	($240,000)
Other operating expenses ( Refer table 3)	($242,000)
Interest ( Refer table 7)	($5,500)
Taxes ( Refer table 12)	($6,800)
Total cash outflows		($586,900)
Net cash flow from operating activities		($900)
Cash Flows from Investing Activities:
Proceeds from sale of land	$6,000
Proceeds from sale of investments	$22,000
Paid to purchase investments	($50,000)
Paid to purchase equipment ( Refer table 5)	($12,000)
Disbursed for notes receivable ( Refer table 9)	($40,000)
Net cash outflow from investing activities		($74,000)
Cash Flows from Financing Activities:
Proceeds from  stock issue ( Refer table 10)	$40,000
Proceeds from  loan	$8,000
Net cash inflow from financing activities		$48,000
Net decrease in cash		($26,900)
Add: beginning cash balance		$86,000
Ending cash balance		$59,100

Table (14)

Conclusion

Therefore, the statement of cash flows of Company Y reports net decrease in cash of $26,900.