Chapter 16, Problem 1PB

To determine

Prepare statement of cash flows using the indirect method for presenting cash flows from operating activities.

Answer to Problem 1PB

Prepare statement of cash flows (Indirect Method).

M Equipment Company
Statement of Cash Flows - Indirect Method
For the Year Ended December 31, 2016
Details	Amount ($)	Amount ($)
Cash flows from operating activities:
Net income		141,680
Adjustments to reconcile net income to net cash flow from operating activities:
Depreciation expense	14,790
Loss on sale of investments	10,200
Changes in current operating assets and liabilities:
Increase in accounts receivable	(19,040)
Increase in inventory	(8,670)
Increase in accounts payable	11,560
Increase in accrued expense payable	3,740	(12,580)
Net cash provided by operating activities		$154,260
Cash flows from investing activities:
Cash received from sale of investment	91,800
Cash used for purchase of land	(295,800)
Cash used for purchase of equipment	(80,580)
Net cash used for investing activities		($284,580)
Cash flows from financing activities:
Cash received from sale of common stock	250,000
Cash used for dividends	(96,900)
Net cash provided by financing activities		$153,100
Increase (decrease) in cash		$22,780
Cash at the beginning of the year		47,940
Cash at the end of the year		$70,720

Table (1)

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 (2)

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 (3)

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 (4)

Working notes:

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	188,190	207,230	19,040	Deduct
Inventories	289,850	298,520	8,670	Deduct
Accounts payable	194,1400	205,700	11,560	Add
Accrued expenses payable	26,860	30,600	3,740	Add

Table (5)

Calculate the amount of depreciation expense:

$\begin{array}{c}\text{Amount of depreciation expense =}\left(\text{Ending balance}-\text{Beginning balance}\right)\\ =\left(\$99,110-\$84,320\right)\\ =\$14,790\end{array}$

Calculate the amount of loss on sale of investments:

$\begin{array}{c}\text{Amount of loss on sale of investments =}\left(\text{Investment balance}-\text{Sale value}\right)\\ =\left(\$102,000-\$91,800\right)\\ =\$10,200\end{array}$

Calculate the amount of dividends:

$\begin{array}{c}\text{Amount of dividends =}\left(\begin{array}{l}\text{ Cash dividends declared}\\ \text{ +Beginning balance of dividends payable -}\\ \text{Ending balance of dividends payable }\end{array}\right)\\ =\left(\$102,000+\$20,400-\$25,500\right)\\ =\$96,900\end{array}$

Conclusion

Therefore, the ending cash balance is $70,720.