Managerial Accounting: The Cornerstone of Business Decision-Making
Managerial Accounting: The Cornerstone of Business Decision-Making
7th Edition
ISBN: 9781337115773
Author: Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Publisher: Cengage Learning
Question
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Chapter 14, Problem 48P

1.

To determine

Compute the cash flows from operations with the use of indirect method.

1.

Expert Solution
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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:

ParticularsAmount ($)
Cash flows from operating activities: 
Net income450,000
Add/ Less: 
    Decrease in accounts receivable168,750
    Decrease in accounts payable2(62,500)
    Increase in inventories3(25,000)
    Depreciation expense4125,000
    Gain on sale of equipment5(50,000)
Net cash from operating activities506,250

Table (1)

Therefore, the net cash from operating activities is $506,250.

Working Note:

1.

Calculation of difference in accounts receivable:

(DifferenceinAccountsReceivable)=(AmountofAccountsReceivableof20X2AmountofAccountsReceivableof20X1)=($281,250$350,000)=$68,750

2.

Calculation of difference in accounts payable:

(DifferenceinAccountsPayable)=(AmountofAccountsPayableof20X2AmountofAccountsPayableof20X1)=($237,500$300,000)=$62,500

3.

Calculation of difference in inventories:

(DifferenceinInventories)=(AmountofInventoriesof20X2AmountofInventoriesof20X1)=($150,000$125,000)=$25,000

4.

Calculation of depreciation expense:

DepreciationExpense=(EndingValueofAccumulatedDepreciationBeginningValueofAccumulatedDepreciation+AccumulatedDepreciationforAssetSold)=($525,000$500,000+$100,000)=$125,000

5.

Calculation of gain on value of equipment:

GainonValueofEquipment=(OriginalValueofEquipmentSalesValueofEquipment)=($225,000$175,000)=$50,000

2.

To determine

Chart the statement of cash flows.

2.

Expert Solution
Check Mark

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 cash inflows and the activities that decrease cash are referred as cash outflows.

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
ParticularsAmount ($)Amount ($)
Cash flows from operating activities:  
Net income450,000 
Add/ Less:  
    Decrease in accounts receivable168,750 
    Decrease in accounts payable2(62,500) 
    Increase in inventories3(25,000) 
    Depreciation expense4125,000 
    Gain on sale of equipment5(50,000) 
        Net cash from operating activities 506,250
Cash flows from investing activities:  
    Sale of equipment175,000 
    Purchase of equipment6(250,000) 
    Purchase of land7(218,750) 
         Net cash from investing activities (293,750)
Cash flows from financing activities:
    Mortgage received250,000 
    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:

(DifferenceinAccountsReceivable)=(AmountofAccountsReceivableof20X2AmountofAccountsReceivableof20X1)=($281,250$350,000)=$68,750

2.

Calculation of difference in accounts payable:

(DifferenceinAccountsPayable)=(AmountofAccountsPayableof20X2AmountofAccountsPayableof20X1)=($237,500$300,000)=$62,500

3.

Calculation of difference in inventories:

(DifferenceinInventories)=(AmountofInventoriesof20X2AmountofInventoriesof20X1)=($150,000$125,000)=$25,000

4.

Calculation of depreciation expense:

DepreciationExpense=(EndingValueofAccumulatedDepreciationBeginningValueofAccumulatedDepreciation+AccumulatedDepreciationforAssetSold)=($525,000$500,000+$100,000)=$125,000

5.

Calculation of gain on value of equipment:

GainonValueofEquipment=(OriginalValueofEquipmentSalesValueofEquipment)=($225,000$175,000)=$50,000

6.

Calculation of purchase value of equipment:

PurchaseValueofEquipment=(EndingValueofEquipmentBeginningValueofEquipment+SalesValue)=($1,025,000$100,000+$225,000)=$250,000

7.

Calculation of purchase value of land:

PurchaseValueofLand=(ValueofLandin20X2ValueofLandin20X1)=($718,750$500,000)=$218,750

3.

To determine

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.

Expert Solution
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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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Students have asked these similar questions
Refer to the information for Booth Manufacturing above.Required:1. Calculate the cash flows from operations using the indirect method.2. Prepare a statement of cash flows.3. CONCEPTUAL CONNECTION Search the Internet to find a statement of cash flows.Which method was used—the indirect method or the direct method? How does the netincome reported compare to the operating cash flows? To the change in cash flows?
Required: • Cash Flow (should follow the given format)
Require: • Cash Flow (should follow the given format)

Chapter 14 Solutions

Managerial Accounting: The Cornerstone of Business Decision-Making

Ch. 14 - In computing the periods net operating cash flows,...Ch. 14 - Explain the reasoning for including the payment of...Ch. 14 - What are the advantages in using worksheets when...Ch. 14 - Prob. 14DQCh. 14 - Cash inflows from operating activities come from...Ch. 14 - Prob. 2MCQCh. 14 - Prob. 3MCQCh. 14 - Sources of cash include a. profitable operations....Ch. 14 - Uses of cash include a. cash dividends. b. the...Ch. 14 - Prob. 6MCQCh. 14 - Prob. 7MCQCh. 14 - Which of the following adjustments to net income...Ch. 14 - An increase in accounts receivable is deducted...Ch. 14 - An increase in inventories is deducted from net...Ch. 14 - The gain on sale of equipment is deducted from net...Ch. 14 - Which of the following is an investing activity?...Ch. 14 - Which of the following is a financing activity? a....Ch. 14 - Prob. 14MCQCh. 14 - A worksheet approach to preparing the statement of...Ch. 14 - In a completed worksheet, a. the debit column...Ch. 14 - Prob. 17BEACh. 14 - Prob. 18BEACh. 14 - Prob. 19BEACh. 14 - Prob. 20BEACh. 14 - Swasey Company earned net income of 1,800,000 in...Ch. 14 - Prob. 22BEACh. 14 - Prob. 23BEACh. 14 - During 20X2, Norton Company had the following...Ch. 14 - Prob. 25BEBCh. 14 - Prob. 26BEBCh. 14 - Roberts Company provided the following partial...Ch. 14 - Prob. 28BEBCh. 14 - Prob. 29BEBCh. 14 - Prob. 30BEBCh. 14 - Prob. 31BEBCh. 14 - During 20X2, Evans Company had the following...Ch. 14 - Stillwater Designs is a private company and...Ch. 14 - Prob. 34ECh. 14 - Jarem Company showed 189,000 in prepaid rent on...Ch. 14 - During the year, Hepworth Company earned a net...Ch. 14 - During 20X1, Craig Company had the following...Ch. 14 - Tidwell Company experienced the following during...Ch. 14 - Prob. 39ECh. 14 - Oliver Company provided the following information...Ch. 14 - Prob. 41ECh. 14 - Prob. 42ECh. 14 - Prob. 43ECh. 14 - Solpoder Corporation has the following comparative...Ch. 14 - Solpoder Corporation has the following comparative...Ch. 14 - The following financial statements were provided...Ch. 14 - Prob. 47PCh. 14 - Prob. 48PCh. 14 - Booth Manufacturing has provided the following...Ch. 14 - The following balance sheets and income statement...Ch. 14 - The following balance sheets and income statement...Ch. 14 - Balance sheets for Brierwold Corporation follow:...Ch. 14 - Balance sheets for Brierwold Corporation follow:...Ch. 14 - Prob. 54PCh. 14 - Prob. 55PCh. 14 - The following balance sheets were taken from the...Ch. 14 - The following balance sheets were taken from the...Ch. 14 - The comparative balance sheets and income...
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