1.
Compute the
1.
Explanation of Solution
Cash Flows from Operating Activities:
This category of a cash flow statement shows the operational and profit generating activities in a firm. The operating cash flows increase or decrease the current assets and current liabilities of a firm.
The cash flows from operations for B Company for 20X2 using indirect method is shown below:
| Particulars | Amount ($) |
| Cash flows from operating activities: | |
| Net income | 450,000 |
| Add/ Less: | |
| Decrease in | 68,750 |
| Decrease in accounts payable2 | (62,500) |
| Increase in inventories3 | (25,000) |
| | 125,000 |
| Gain on sale of equipment5 | (50,000) |
| Net cash from operating activities | 506,250 |
Table (1)
Therefore, the net cash from operating activities is $506,250.
Working Note:
1.
Calculation of difference in accounts receivable:
2.
Calculation of difference in accounts payable:
3.
Calculation of difference in inventories:
4.
Calculation of depreciation expense:
5.
Calculation of gain on value of equipment:
2.
Chart the statement of cash flows.
2.
Explanation of Solution
Cash Flow Statement:
Cash flow statement is a financial statement prepared to provide information about the sources and uses of cash in a firm. In this statement, the activities increasing cash are referred as
The statement of cash flows for the B Manufacturing for year ending 20X2 is as shown below:
| B Company | ||
| Cash Flows from Operations | ||
| For the year ended December31, 20X2 | ||
| Particulars | Amount ($) | Amount ($) |
| Cash flows from operating activities: | ||
| Net income | 450,000 | |
| Add/ Less: | ||
| Decrease in accounts receivable1 | 68,750 | |
| Decrease in accounts payable2 | (62,500) | |
| Increase in inventories3 | (25,000) | |
| Depreciation expense4 | 125,000 | |
| Gain on sale of equipment5 | (50,000) | |
| Net cash from operating activities | 506,250 | |
| Cash flows from investing activities: | ||
| Sale of equipment | 175,000 | |
| Purchase of equipment6 | (250,000) | |
| Purchase of land7 | (218,750) | |
| Net cash from investing activities | (293,750) | |
| Cash flows from financing activities: | ||
| Mortgage received | 250,000 | |
| Payment of dividends | (225,000) | |
| Net cash from financing activities | 25,000 | |
| Net increase in cash | 237,500 | |
Table (2)
Therefore, there is a net increase in cash of $237,500.
Working Note:
1.
Calculation of difference in accounts receivable:
2.
Calculation of difference in accounts payable:
3.
Calculation of difference in inventories:
4.
Calculation of depreciation expense:
5.
Calculation of gain on value of equipment:
6.
Calculation of purchase value of equipment:
7.
Calculation of purchase value of land:
3.
Identify the method used in preparing the statement of cash flows of a company. Also, explain the manner in which the net income is compared with the operating cash flows and to the change in cash flows.
3.
Explanation of Solution
Generally, companies use indirect method to prepare the statement of cash flows. The net income after making all the adjustments of the noncash and non-operating expenses is equal to the operating cash flows. The net income changes with respect to the increase and decrease in cash flows.
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Chapter 14 Solutions
Managerial Accounting: The Cornerstone of Business Decision-Making
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