Chapter 12, Problem 3GLP

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 Determine: Journal entries and cash flow statement

Explanation of Solution

Purchase of the equipment

Date	Account title and explanation	post ref.	Amount ($)	Amount ($)
	Equipment		36,000
	Cash			36,000
	(to record the purchase of the equipment)

Table (1)

• 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, credt the cash account.

Issue of share

Date	Account title and explanation	post ref.	Amount($)	Amount($)
	Cash		60,000
	Common stock			60,000
	(to record issue of the common stock)

Table (2)

• Cash is assets account of the company. Here, cash of the company is increased which increase the assets of the company. So, debit the cash account.
• Common stock is the liability account. Here, common stock increases the debt of the company. So, credit the common stock account.

Declared and payment of the dividends

Date	Account title and explanation	post ref.	Amount($)	Amount($)
	Dividends		89,000
	Cash			89,000
	(to record the payment of the dividend)

Table (3)

• A dividend is the expense account which increased the debt of the company. Hence, debit dividend account.
• Cash is the assets account. Here cash reduces the debts of the company. So credit the cash account.

Increase in the account receivable

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

Table (4)

• 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.

Purchase the inventory by cash

Date	Account title and explanation	post ref.	Amount($)	Amount($)
	Inventory account		440
	Cash			440
	(to record the purchase of the inventory)

Table (5)

• Inventory is the assets account. Here, the inventory of the company is decreasing which decreases the asset of the company. So, debit the inventory account.
• Cash is the asset account. Here, cash of the company is decreasing which decrease the asset value of the company. So credit the assets account.

Increase in the account payable

Date	Account title and explanation	post ref.	Amount($)	Amount($)
	Purchase		16,000
	Account payable			16,000
	(to record the account payable)

Table (6)

• Purchase is the expense account. Here, something is purchase due to which purchase expense is increased. So, debit the purchase account.
• Account payable is the liability account. Here, account payable is increased. So, credit the account payable account.

Increase in the income tax payable

Date	Account title and explanation	post ref.	Amount($)	Amount($)
	Retained earning		3,000
	Income tax payable			3,000
	(to record the income tax payable)

Table (7)

• Retained earnings belong to the share holders which reduces the wealth of the share. Hence, debit the retained earnings account.
• Income tax payable is the liability account. Here, the income tax payable is increasing which increases the liabilities of the company. So, credit the income tax payable account.

Cash flow statement (Indirect method)

Cash flow statement For the year December 31,2017
Particulars	Amount ($)
Cash flow from operating activities:
Net income	136,000
Adjustment for non cash expenses
Add: Depreciation expense	54,000
Adjustment for working capital changes:
Less: Increase in net working capital	(68,000)
Net cash flow from operating activities(A)	122,000
Cash paid from acquiring new equipment	(36,000)
Cash flow from investing activities(B)	(36,000)
Cash from issuance of shares	60,000
cash paid for dividends	(89,000)
Cash flow from financing activities(C)	(29,000)
Net increase in cash (A)+(B)+(C)	(57,000)
Cash and cash equivalent December 31,2016	107,000
Cash and cash equivalent December 31,2017	164,000

Table (8)

Working note:

Calculate the increase/decrease in the net working capital

Particulars	2017(X)	2016(Y)	Increase/decrease
Account receivable	83,000	71,000	12,000
Inventory	601,000	526,000	75,000
Increase/decrease in current assets(D)			87,000
Accounts payable	87,000	71,000	16,000
Income tax payable	28,000	25,000	3,000
Increase/decrease in current liabilities(E)
Increase/decrease in working capital(D)-(E)			68,000

Table (9)