Chapter 16, Problem 3PA

The comparative balance sheet of Whitman Co. at December 31, 2016 and 2015, is as follows:

The noncurrent asset, noncurrent liability, and stockholders’ equity accounts for 2016 are as follows:

Instructions

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

To determine

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

Answer to Problem 3PA

Company W
Statement of Cash Flows
For the year ended December 31, 2016
Details	Amount ($)	Amount ($)
Cash flows from operating activities:
Net loss	(35,320)
Adjustments to reconcile net income to net cash flow from operating activities:
Depreciation expense	55,620
Loss on sales of land	12,600
Changes in current operating assets and liabilities:
Increase in accounts receivable	(66,960)
Increase in merchandised inventory	(105,480)
Decrease in prepaid expenses	5,760
Decrease in accounts payable	(35,820)
Net cash used for operating activities		(169,600)
Cash flows from investing activities:
Cash from land sold	151,200
Cash used for acquisition of building	(561,600)
Cash used for purchase of equipment	(104,400)
Net cash used for investing activities		($514,800)
Cash flows from financing activities:
Cash received from sale of common stock	400,000
Cash received from issuance of bonds payable	270,000
Cash used for dividends	(32,400)
Net cash provided by financing activities		$637,600
Increase (decrease) in cash		($46,800)
Cash at the beginning of the year		964,800
Cash at the end of the year		$918,000

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 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	761,940	828,900	66,960	Deduct
Merchandised inventories	1,162,980	1,268,460	105,480	Deduct
Prepaid expenses	35,100	5,760	(29,340)	Add
Accounts payable	958,320	922,500	(35,820)	Deduct

Table (5)

Working notes:

Calculate the amount of loss on sale of land:

$\begin{array}{c}\text{Loss on sale of land = }\left(\begin{array}{l}\text{Book value}\\ -\text{Sale value}\end{array}\right)\\ =\left(\begin{array}{l}\$163,800\\ -\$151,200\end{array}\right)\\ =\$12,600\left(\text{Loss}\right)\end{array}$

Calculate the amount of depreciation expense:

$\begin{array}{c}\text{Depreciation expense = }\left(\begin{array}{l}\text{Depreciation of building}\\ \text{+Depreciation of equipment}\end{array}\right)\\ =\left(\begin{array}{l}\$26,280\\ +\$29,340\end{array}\right)\\ =\$55,620\end{array}$

Calculate the amount of cash received from common stock:

$\begin{array}{c}\text{Cash received from common stock = }\left[\begin{array}{l}\text{Common stock @ Par value +}\\ \text{Common stock over Par value}\end{array}\right]\\ \text{=\$200,000+\$200,000}\\ \text{=\$400,000}\end{array}$

$\begin{array}{c}\text{Common stock @ Par value =}\left(\begin{array}{l}\text{Common stock in 2016}-\\ \text{Common stock in 2015}\end{array}\right)\\ \text{=317,000}-\text{\$117,000}\\ \text{=\$200,000}\end{array}$

$\begin{array}{c}\text{Common stock over Par value =}\left(\begin{array}{l}\text{Common stock in 2016}-\\ \text{Common stock in 2015}\end{array}\right)\\ \text{=758,000}-\text{\$558,000}\\ \text{=\$200,000}\end{array}$

Conclusion

Therefore, the ending cash balance is $918,000.