Statement of
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: These are the cash produced by the normal business operations.
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 |
| |
| 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.
The below table shows the way of calculation of cash flows from investing activities:
| Cash flows from investing activities |
| Add: Proceeds from sale of fixed assets |
| Sale of marketable securities / investments |
| Interest received |
| 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.
The below table shows the way of calculation of cash flows from financing activities:
| Cash flows from financing activities |
| Add: Issuance of common stock |
| Proceeds from borrowings |
| Proceeds from issuance of debt |
| Issuance of bonds payable |
| Deduct: Payment of dividend |
| Repayment of debt |
| Interest paid |
| Redemption of debt |
| Repurchase of stock |
| Net cash provided from or used by financing activities |
Table (3)
To Prepare: A statement of cash flows using the indirect method for presenting cash flows from operating activities.
Explanation of Solution
Explanation
| Company W | ||
| Statement of Cash Flows | ||
| For the year ended December 31, 2016 | ||
| Details | Amount ($) | Amount ($) |
| Cash flows from operating activities: | ||
| Net loss | (35,320) | |
| Adjustments to reconcile net income to net cash flow from operating activities: | ||
| Depreciation expense | 55,620 | |
| Loss on sales of land | 12,600 | |
| Changes in current operating assets and liabilities: | ||
| Increase in |
(66,960) | |
| Increase in merchandised inventory | (105,480) | |
| Decrease in prepaid expenses | 5,760 | |
| Decrease in accounts payable | (35,820) | |
| Net cash used for operating activities | ($169,600) | |
| Cash flows from investing activities: | ||
| Cash from land sold | 151,200 | |
| Cash used for acquisition of building | (561,600) | |
| Cash used for purchase of equipment | (104,400) | |
| Net cash used for investing activities | ($514,800) | |
| Cash flows from financing activities: | ||
| Cash received from sale of common stock | 400,000 | |
| Cash received from issuance of bonds payable | 270,000 | |
| Cash used for dividends | (32,400) | |
| Net cash provided by financing activities | $637,600 | |
| Increase (decrease) in cash | ($46,800) | |
| Cash at the beginning of the year | 964,800 | |
| Cash at the end of the year | $918,000 | |
Table (4)
Working notes:
Prepare the schedule in the changes of current assets and liabilities.
| Schedule in the Change of Current Assets and Liabilities | ||||
| Details | Amount ($) | Effect on Operating Activities | ||
| Beginning Balance | Ending Balance | Increase/ (Decrease) |
||
| Accounts receivable | 761,940 | 828,900 | 66,960 | Deduct |
| Merchandised inventories | 1,162,980 | 1,268,460 | 105,480 | Deduct |
| Prepaid expenses | 35,100 | 29,340 | (5,760) | Add |
| Accounts payable | 958,320 | 922,500 | (35,820) | Deduct |
Table (5)
Calculate the amount of cash received from common stock:
Cash received from common stock = [Common stock @ Par value +Common stock over Par value]=$200,000+$200,000=$400,000
Common stock @ Par value =(Common stock in 2016−Common stock in 2015)=317,000−$117,000=$200,000
Common stock over Par value =(Common stock in 2016−Common stock in 2015)=758,000−$558,000=$200,000
Therefore, the ending cash balance is $918,000
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Chapter 14 Solutions
CengageNOWv2, 2 terms Printed Access Card for Warren?s Financial & Managerial Accounting, 13th, 13th Edition
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