Chapter 14, Problem 14P

To determine

Cash Flow Statement: The statement which summarizes the net amount of cash disbursed and received with regards to a particular activity is called cash flow statement.

Cash Flow: In a specific period of time, the amount of cash disbursed or received with regards to a particular activity is called cash flow.

To Prepare: Cash flow statement and explain the problems revealed by it.

Answer to Problem 14P

Solution: The cash flow statement shows that there is a net increase of $21000 in the company’s operations.

Explanation of Solution

The cash flow statement of the company is prepared as under −

Particulars	$
Net Income	250000
(-) Gain on Sale of equipment	-60000
(+) Loss on Sale of investment	20000
(+) Depreciation Expense	95000
Cash Flow before working capital changes	305000
(-) Increase in Accounts Receivable	-180000
(+) Decrease in Inventory	12000
(-) Increase in Prepaid Expenses	-5000
(+) Increase in Accounts Payable	300000
(-) Decrease in Accrued Liabilities	-17000
(+) Increase in income tax payable	15000
Cash flow after working capital changes	430000
(-) Income Taxes Paid	-80000
Net Cash Flow from Operating Activities	350000
(-) Purchase of Property Plant Equipment	-700000
(+) Sale of Property Plant Equipment	70000
(-) Increase in Loan to Subsidiaries	-44000
(+) Sale of Long-term investments	110000
Net Cash Flow from Investing Activities	-564000
(+)New Bonds Payable	570000
(-) Bonds Payable repaid	-350000
(+) Issue of Common Stock	90000
(-) Dividends Paid	-75000
Net Cash Flow from Financing Activities	235000
Net Increase/Decrease in Cash/Cash Equivalents	21000
Opening Balance in Cash & cash equivalents	40000
Closing Balance in Cash & cash equivalents	61000

The problems observed in the cash flow statement are −

Property Plant and Equipment
Particulars	$	Particulars	$
Balance b/d	2600000	Cash (Sale)	70000
Cash (purchase)	700000	Accumulated Depreciation	40000
		Balance c/d	3170000
		Loss on equipment	20000
	3300000		3300000

Long term investments
Particulars	$	Particulars	$
Balance b/d	110000	Cash (Sale)	110000
Gain on sale	60000	Balance c/d	60000
	170000		170000

Accumulated Depreciation
Particulars	$	Particulars	$
Property Plant equipment	40000	Balance b/d	755000
Balance c/d	810000	Depreciation Expense	95000
	850000		850000

Bonds Payable
Particulars	$	Particulars	$
Cash (repaid)	350000	Balance b/d	600000
Balance c/d	820000	Cash (new loan)	570000
	1170000		1170000

Retained Earnings:

Ending Retained Earnings = Opening Retained Earnings + Net Income − Dividend Paid

$573,000 = $478,000 + $170,000 − Dividend Paid

Dividend Paid = $648,000 - $573,000 = $75,000

The problems observed in the cash flow statement are:

• Complete details are not observed in the details provided. As a result, there is a difference of $225000 in the cash flow statement. This is assumed to be the depreciation which is to be charged on the assets including the new assets purchased by the company.
• The company should improve its operating cycle since its accounts payables as well as the accounts receivables are continuously increasing. This results in more cash outflow than the cash inflow.
• The company has an unplanned capital expenditure of purchase of plant and equipment which is not required as the company already lack in liquidity as per the present cash flow situation.