Chapter 12, Problem 6BP

To determine

Prepare a complete statement of cash flows and report its cash inflows and cash outflows from operating activities using indirect method.

Explanation of Solution

Statement of cash flows: Statement of cash flows reports all the cash transactions which are responsible for inflow and outflow of cash and result of these transactions is reported as ending balance of cash at the end of reported period. Statement of cash flows includes the changes in cash balance due to operating, investing, and financing activities.

Indirect method: Under this method, the following amounts are to be adjusted from the Net Income to calculate the net cash provided from operating activities.

Cash flows from operating activities: Operating activities refer to the normal activities of a company to carry out the business.

The below table shows the way of calculation of cash flows from operating activities:

Cash flows from operating activities (Indirect method)

Add: Decrease in current assets

Increase in current liability

Depreciation expense and amortization expense

Loss on sale of plant assets

Deduct: Increase in current assets

Decrease in current liabilities

Gain on sale of plant assets

Net cash provided from or used by operating activities

Table (1)

Cash flows from investing activities: Cash provided by or used in investing activities is a section of statement of cash flows. It includes the purchase or sale of equipment or land, or marketable securities, which is used for business operations.

Cash flows from investing activities

Add: Proceeds from sale of fixed assets

Sale of marketable securities / investments

Dividend received

Deduct: Purchase of fixed assets/long-lived assets

Purchase of marketable securities

Net cash provided from or used by investing activities

Table (2)

Cash flows from financing activities: Cash provided by or used in financing activities is a section of statement of cash flows. It includes raising cash from long-term debt or payment of long-term debt, which is used for business operations.

Cash flows from financing activities

Add: Issuance of common stock

Proceeds from borrowings

Proceeds from sale of treasury stock

Proceeds from issuance of debt

Deduct: Payment of dividend

Repayment of debt

Interest paid

Redemption of debt

Purchase of treasury stock

Net cash provided from or used by financing activities

Table (3)

Non-Cash Transactions:

The transaction, which does not involve any cash dealings, is known as non-cash transactions. In these type transactions there will not be any inflow or outflow of cash. Simply put, the transaction, which does not have an impact on the inflow or outflow of cash, is called as non-cash transactions.

Examples of significant non-cash transactions are stated below:

• Issue of common stock to retire long-term debt.
• Purchase of machinery by issuing notes payable.
• Issuance of common stock for purchase of land.

Step 1: Prepare statement of schedule changes of assets and liabilities.

Schedule of the changes in assets and liabilities
Particulars	Amount (millions)			Adjustment in Operating Activities
	Current year  (December 31, 2015)	Previous year (December 31, 2014)	Increase/ (Decrease)
Accounts receivable	$20,222	$25,860	($5,638)	Add
Inventory	$165,667	$140,320	$25,347	Less
Accounts payable	$20,372	$157,530	($137,158)	Less
Income taxes payable	$2,100	$6,100	($4,000)	Less

Table (4)

Step 2: Prepare statement of cash flows of the S Company for the year ended December 31, 2015.

Company S
Statement of Cash Flows – Indirect Method
For Year Ended December 31, 2015
Particulars	Amount	Amount
Cash flows from operating activities
Net income		$202,767
Adjustments to reconcile net income to net cash provided by operating activities
Income statement items not affecting cash
Add: Depreciation expense	$15,700
Changes in current assets and current liabilities
Add: Decrease in  accounts receivable	$5,638
Less: Increase in inventory	($25,347)
Less: Decrease in  accounts payable	($137,158)
Less: Decrease in income taxes payable	($4,000)	($145,167)
Net cash provided by operating activities		$57,600
Cash flows from investing activities
Cash paid for equipment	($30,250)
Net cash used in investing activities		($30,250)
Cash flows from financing activities
Cash received from issuing stock $\left(3,000\text{ shares }\times \$21\text{ per share}\right)$	$63,000
Less: Cash paid for cash dividends	($60,000)
Net cash provided by financing activities		$3,000
Net increase in cash		$30,350
Add: Cash balance at December 31, 2014		$28,400
Cash balance at December 31, 2015		$58,750

Table (5)

Compute the amount of issuance of common stock:

$\begin{array}{c}\text{Issuance of common stock =}\left(\begin{array}{l}\text{ Number of issued common shares }\\ \times \text{ Cash per share}\end{array}\right)\\ =\left(3,000\text{ shares}\times \text{\$21}\right)\\ =\$63,000\end{array}$