Chapter 16, Problem 1GLP

Requirement 1

To determine

To prepare:

IKIBAN INC.
Cash flow Statement
For the year ended June 30, 2015
Cash flow from Operating Activities
Net Income		99,510
Add: Depreciation expense	58,600
Less: Gain on sale of equipment	-2000
Adjustments for changes in working capital
Less: Increase in accounts receivables	-14000
Add: Decrease in Inventory	22700
Add: Decrease in prepaid expenses	1000
Less: Decrease in Accounts payable	-5000
Less: Decrease in wages payable	-9000
Less: Decrease in Income taxes payable	-400
Total adjustments added to net income		51,900
Cash flow from Operating Activities (A)		151,410
Cash flow from Investing activities
Purchase of equipment	-57600
Sale of equipment	10,000
Cash used in investing activities (B)		-47,600
CASH FLOW from financing activities
Issue of common stock	60000
Payment of notes payable	-30,000
Dividends paid	-90310
Cash used in financing activities (C)		-60,310
Changes In cash (A+B+C)		43,500
Cash balance - Beginning		44,000
Cash Balance − ending		87,500

Explanation of Solution

The above statement of cash flows is prepared as under −
The statement of cash flows is divided into three parts −

1. Cash flow from operating activities
2. Cash flow from investing activities
3. Cash flow from financing activities
The calculations and working for all the activities are explained as under −

4. Cash flow from operating activities
Given,

5. Net income = $ 99,510
6. Depreciation expense = $ 58,600 (non-cash expense)
7. Gain on sale of Equipment = $ 2,000
8. Current assets, 2015 −
9. Accounts receivables = $ 65,000
10. Inventory = $ 63,800
11. Prepaid expenses = $ 4,400
12. Current liabilities 2015 −
13. Accounts Payable = $ 25,000
14. Wages Payable = $ 6,000
15. Income Taxes Payable = $ 3,400
16. Current assets, 2014 −
17. Accounts receivables = $ 44,000
18. Inventory = $ 51,000
19. Prepaid expenses = $ 5,400
20. Current liabilities 2014 −
21. Accounts Payable = $ 30,000
22. Wages Payable = $ 15,000
23. Income Taxes Payable = $ 3,800

	2015	2014	Increase or Decrease	Amounts
Current Assets
Accounts receivables	65,000	51,000	Increase	14,000
Inventory	63,800	86,500	Decrease	22,700
Prepaid expenses	4,400	5,400	Decrease	1,000
Current Liabilities
Accounts Payable	25,000	30,000	Decrease	5,000
Wages Payable	6,000	15,000	Decrease	9,000
Income Taxes Payable	3,400	3,800	Decrease	400

The cash flow from operating activities is prepared on the basis of −

Add: Decrease in Current Assets, Increase in Current Liabilities

Less: Increase in Current Assets, Decrease in Current Assets.
The adjustments are added to net income −

  $Cashflowfromoperatingactivities=NetIncome+Adjustmentstoreconcilenetincome$

The adjustment to reconcile net income is calculated as under −

  $\begin{array}{l}Adjustmenttonetincome=\left(\begin{array}{l}Depreciation-Gainonsaleofequipment\\ -Increaseinaccountsreceivables\\ +DecreaseinInventory+Decreaseinprepaidexpenses\\ -DecreaseinAccountspayable\\ -Decreaseinwagespayable\\ -DecreaseinIncometaxespayable\end{array}\right)\hfill \\ \begin{array}{l}Adjustmenttonetincome=\left(\begin{array}{l}\$58,600-\$2,000-\$14,000+\$22,700\\ +\$1,000-\$5,000-\$9,000-\$400\end{array}\right)\\ Adjustmenttonetincome=\$\text{ 5}1,900\end{array}\hfill \end{array}$

Cash flow from operating activities is −

  $\begin{array}{l}Cashflowfromoperatingactivities=NetIncome+Adjustmentstoreconcilenetincome\\ Cashflowfromoperatingactivities=\$\text{ 99},510-\$\text{ 51},900\\ Cashflowfromoperatingactivities=\$\text{ 151},410\end{array}$

The cash flow from operating activities = $ 151,410.

Cash flow from or used Investing Activities −

The cash flow from or used from investing activities can be calculated as under −
The sale and purchase of fixed assets are covered in the investing activities.
Given,

• Purchas of equipment = $ 57,600
• Cost of equipment sold = $ 48,600
• Gain on sale of equipment = $ 2,000
• Beginning accumulated depreciation = $ 9,000
• Ending accumulated depreciation = $ 27,000

Now, the depreciation on the machine sold will be calculated −

  $\begin{array}{l}\begin{array}{l}Depreciationonmachine=\left(\begin{array}{l}Beginningaccumulateddepreciation\\ +Depreciationfortheyear\end{array}\right)–Endingaccumulateddepreciation\hfill \\ Depreciationonmachine=\left(\$9,000+\$58,600\right)-\$27,000\hfill \end{array}\\ Depreciationonmachine=\$40,600\end{array}$

Now, the selling price of machine will be calculated −

  $\begin{array}{l}Sellingpriceofmachine=Costofmachine–Depreciationonmachine+Gainonsaleofmachine\hfill \\ Sellingpriceofmachine=\$48,600-\$40,600+\$2,000\hfill \\ Sellingpriceofmachine=\$10,000\hfill \end{array}$

Now, cash used in investing activities −

  $\begin{array}{l}Cashusedininvesting=Saleofequipment-Purchaseofequipment\hfill \\ Cashusedininvesting=\$10,000-\$57,600\hfill \\ Cashusedininvesting=-\$47,600\hfill \end{array}$

The cash used in investing activities = - $ 47,600.

Cash flow from financing activities −

The cash flow from financing activities is calculated as under −
Given,

• Common stock for 2015 = $ 220,000
• Common stock for 2014 = $ 160,000
• Payments towards notes payable = $ 30,000
• Retained earnings beginning = $ 24,100
• Retained earnings ending = $ 33,300
• Net income for the year = $ 99,510

Cash received from issue of common stock −

  $\begin{array}{l}Issueofcommonstock=Commonstockfor2015-Commonstockfor2014\hfill \\ Issueofcommonstock=\$\text{ 22}0,000-\$160,000\hfill \\ Issueofcommonstock=\$\text{ 6}0,000\hfill \end{array}$

Cash paid to dividends −

  $\begin{array}{l}Dividendspaid=Retainedearningsbeginning+Netincome–Retainedearningsending\hfill \\ Dividendspaid=\$24,100+\$99,510-\$33,300\hfill \\ Dividendspaid=\$90,310\hfill \end{array}$

Cash flow used in financing activities −

  $\begin{array}{l}Cashflowusedinfinancingactivities=Issueofcommonstock–Paymenttowardsnotespayable–Dividendspaid\hfill \\ Cashflowusedinfinancingactivities=\$60,000-\$30,000-\$90,310\hfill \\ Cashflowusedinfinancingactivities=-\$60,310\hfill \end{array}$ After calculating the cash flow from or used from the three activities, the change in cash will be calculated.

  $\begin{array}{l}\begin{array}{l}Changeincash=Cashflowusedinoperatingactivities+Cashflowusedininvestingactivities\\ +Cashflowfromfinancingactivities\end{array}\hfill \\ Changeincash=\left(\$151,410\right)+\left(-\$\text{ 47},600\right)+\text{ (-}\$\text{ 6}0,310)\hfill \\ Changeincash=\$\text{ 43,500}\hfill \end{array}$

Now, the ending cash balance will be calculated −

  $\begin{array}{l}Endingcashbalance=BeginningCashbalance+ChangesinCash\hfill \\ Endingcashbalance=\$\text{ 44,000 }+\text{ 43,500}\hfill \\ Endingcashbalance=\$\text{ 87},500.\hfill \end{array}$

The statement of cash flow has been prepared.

Conclusion

Thus, the statement of cash flows for the year ended December 31, 2016 has been prepared.

Requirement 2

To determine

To compute:

Cash flow on Total assets ratio of the company for its fiscal year 2015

Answer to Problem 1GLP

Solution:

Cash flow on Total assets ratio of the company for its fiscal year 2015 = 49.6%

Explanation of Solution

The above answer can be explained as under −
Given,

• Cash flow from operating activities = $ 151,410
• Beginning total assets = $ 317,700
• Ending total assets = $ 292,900
$\text{Average total assets}=\frac{\text{Beginning Total assets}+\text{Ending total assets}}{2}$

  $\begin{array}{l}\text{Average total assets}=\frac{\$292,900+\$\text{ 317,700}}{2}\\ \text{Average total assets}=\$305,300\end{array}$

Now, the cash flow on total assets ratio −

  $\begin{array}{l}Cashflowontotalassetsratio=\frac{Cashflowfromoperatingactivities}{Averagetotalassets}\hfill \\ Cashflowontotalassetsratio=\frac{\$151,410}{\$305,300}\hfill \\ Cashflowontotalassetsratio=49.6\%\hfill \end{array}$

Conclusion

Thus, the company’s cash flow on total assets ratio for its fiscal year 2015 has been calculated.