Concept explainers
Statement of
The comparative
The following additional information is taken from the records:
- A. Land was sold for $120.
- B. Equipment was acquired for cash.
- C. There were no disposals of equipment during the year.
- D. The common stock was issued for cash.
- E. There was a $62 credit to
Retained Earnings for net income. - F. There was a $24 debit to Retained Earnings for cash dividends declared.
- A. Prepare a statement of cash flows, using the indirect method of presenting cash flows from operating activities.
- B. Was Olson-Jones’s net cash flow from operations more or less than net income? What is the source of this difference?
A.
Prepare a statement of cash flows under indirect method.
Answer to Problem 17E
O Industries | ||
Statement of Cash Flows - Indirect Method | ||
Details | Amount ($) | Amount ($) |
Cash flows from operating activities: | ||
Net income | 62 | |
Adjustments to reconcile net income to net cash flow from operating activities: | ||
Depreciation expense | 26 | |
Gain on sale of land | (40) | |
Changes in current operating assets and liabilities: | ||
Increase in accounts receivable | (6) | |
Increase in inventory | (18) | |
Increase in accounts payable | 14 | (24) |
Net cash provided by operating activities | $38 | |
Cash flows from investing activities: | ||
Cash from sale of land | 120 | |
Cash used for purchase of equipment | (30) | |
Net cash provided by investing activities | $90 | |
Cash flows from financing activities: | ||
Cash from sale of common stock | 60 | |
Cash used for dividends | (19) | |
Net cash provided by financing activities | $41 | |
Increase (decrease) in cash | $169 | |
Cash at the beginning of the year | 14 | |
Cash at the end of the year | $183 |
Table (4)
Explanation of Solution
Statement of cash flows: It is one of the financial statement that shows the cash and cash equivalents of a company for a particular period. It determines the net changes in cash through reporting the sources and uses of cash due to the operating, investing, and financing activities of a company.
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 |
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.
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)
Working note:
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 | 49 | 55 | 6 | Deduct |
Inventories | 99 | 117 | 18 | Deduct |
Accounts payable | 37 | 51 | 14 | Add |
Table (3)
Calculate the amount of depreciation expense:
Calculate the amount gain on sale of land:
Calculate the amount of cash used to purchase of equipment:
Calculate the amount of cash from common stock:
Calculate the amount of dividends:
Therefore, the ending cash balance is $183.
B.
Explain the cash flow from operations more or less than net income.
Explanation of Solution
- • Depreciation expense amount of $26 does not show any effect on cash flow from operating activities.
- • The gain on sale of land of $40 will be reported in operating activities. The proceeds from sale of $120 will be reported in the investing activities section of the statement of cash flows.
- • Moreover, the changes in current operating assets and liabilities are added or deducted based on the effect of below cash flows:
Increase in accounts receivable $6 (Deducted).
. Increase in inventories $18 (Deducted).
Increase in accounts payable $14 (Added).
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