Accounting (Text Only)
Accounting (Text Only)
26th Edition
ISBN: 9781285743615
Author: Carl Warren, James M. Reeve, Jonathan Duchac
Publisher: Cengage Learning
Question
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Chapter 16, Problem 16.17EX

a.

To determine

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)

To Prepare: A statement of cash flows under indirect method.

a.

Expert Solution
Check Mark

Answer to Problem 16.17EX

P Industries
Statement of Cash Flows - Indirect Method
Details Amount ($) Amount ($)
Cash flows from operating activities:
Net income 325
Adjustments to reconcile net income to net cash flow from operating activities:
Depreciation expense 30
Gain on sale of land (75)
Changes in current operating assets and liabilities:
Increase in accounts receivable (80)
Increase in inventory (65)
Increase in accounts payable 15 (175)
Net cash provided by operating activities $150
Cash flows from investing activities:
Cash from sale of land 125
Cash used for purchase of equipment (50)
Net cash provided by investing activities $75
Cash flows from financing activities:
Cash from sale of common stock 175
Cash used for dividends (70)
Net cash provided by financing activities $105
Increase (decrease) in cash $330
Cash at the beginning of the year 160
Cash at the end of the year $490

Table (4)

Explanation of Solution

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 200 280 80 Deduct
Inventories 110 175 65 Deduct
Accounts payable 160 175 15 Add

Table (3)

Calculate the amount of depreciation expense:

Amount of depreciation expense =( Ending balance - Beginning balance)=($60$30)=$30

Calculate the amount gain on sale of land:

Amount gain on sale of land[Book value of land( Beginning balance - Ending balance )Sale value]=($50($450$400)$125)=$75

Calculate the amount of cash used to purchase of equipment:

Amount of cash used to purchase of equipment }=( Ending balance - Beginning balance)=($225$175)=$50

Calculate the amount of cash from common stock:

Amount of cash fromcommon stock}=[( Ending balance - Beginning balance)+(Paid in capital Ending balance - Beginning balance)]=[($50$100)+($125$250)]=$50+125=$175

Calculate the amount of dividends:

Amount of dividends =( Cash dividends declaredDivdends payable )=($100$30)=$70

Conclusion

Therefore, the ending cash balance is $490.

b.

To determine

To Explain: The cash flow from operations more or less than net income.

b.

Expert Solution
Check Mark

Explanation of Solution

  • Depreciation expense amount of $30 does not show any effect on cash flow from operating activities.
  • The gain on sale of land of $75 will be reported as the proceeds from sale 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 $80(Deducted).

Increase in inventories $65 (Deducted).

Increase in accounts payable $15 (Added)

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Chapter 16 Solutions

Accounting (Text Only)

Ch. 16 - Prob. 16.1APECh. 16 - Classifying cash flows Identify whether each of...Ch. 16 - Prob. 16.2APECh. 16 - Prob. 16.2BPECh. 16 - Changes in current operating assets and...Ch. 16 - Changes in current operating assets and...Ch. 16 - Prob. 16.4APECh. 16 - Prob. 16.4BPECh. 16 - Prob. 16.5APECh. 16 - Land transactions on the statement of cash flows...Ch. 16 - Prob. 16.6APECh. 16 - Prob. 16.6BPECh. 16 - Cash payments for merchandisedirect method The...Ch. 16 - Cash payments for merchandisedirect method The...Ch. 16 - Free cash flow McMahon Inc. reported the following...Ch. 16 - Prob. 16.8BPECh. 16 - Prob. 16.1EXCh. 16 - Effect of transactions on cash flows State the...Ch. 16 - Prob. 16.3EXCh. 16 - Prob. 16.4EXCh. 16 - Cash flows from operating activities-indirect...Ch. 16 - Prob. 16.6EXCh. 16 - Prob. 16.7EXCh. 16 - Determining cash payments to stockholders The...Ch. 16 - Reporting changes in equipment on statement of...Ch. 16 - Prob. 16.10EXCh. 16 - Reporting land transactions on statement of cash...Ch. 16 - Prob. 16.12EXCh. 16 - Reporting land acquisition for cash and mortgage...Ch. 16 - Reporting issuance and retirement of longterm debt...Ch. 16 - Prob. 16.15EXCh. 16 - Prob. 16.16EXCh. 16 - Prob. 16.17EXCh. 16 - Prob. 16.18EXCh. 16 - Prob. 16.19EXCh. 16 - Prob. 16.20EXCh. 16 - Prob. 16.21EXCh. 16 - Prob. 16.22EXCh. 16 - Cash flows from operating activitiesdirect method....Ch. 16 - Prob. 16.24EXCh. 16 - Free cash flow The financial statement for Nike,...Ch. 16 - Free cash flow Lovato Motors Inc. has cash flows...Ch. 16 - Prob. 16.1APRCh. 16 - Statement of cash flowsindirect method The...Ch. 16 - Prob. 16.3APRCh. 16 - Statement of cash flows-direct method The...Ch. 16 - Prob. 16.5APRCh. 16 - Prob. 16.1BPRCh. 16 - Statement of cash flowsindirect method The...Ch. 16 - Prob. 16.3BPRCh. 16 - Statement of cash flows-direct method The...Ch. 16 - Prob. 16.5BPRCh. 16 - Ethics in Action Lucas Hunter, president of...Ch. 16 - Using the statement of cash flows You are...Ch. 16 - Dillip Lachgar is the president and majority...Ch. 16 - Prob. 16.4CP
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