Chapter 16, Problem 4APSA

To determine

Introduction: Cash Flow Statement is an important part of the Financial Statements of an enterprise. It shows the inflow and outflow of Cash during a particular period. It is an analytical tool to check the short term ability of a company to pay its coming liabilities. It comprises of three activities called Operating Activities, Investing Activities and Financing Activities.

Operating activity is the most important section of the Statement of Cash Flows. It depicts the Cash Inflows and Outflows with respect to the day-to-day operations of the enterprise. Here, Cash Inflows are cash receipts from customers for sale of merchandise inventory or services and Cash Outflows are payments for purchase of merchandise inventory or operating expenses. As per IFRS, Interest & Dividend incomes, Interest & Dividend payments can also be included in operating activities.

Operating Activities can be reported using any of the following methods:

1. Indirect Method: It starts from Net Income and adjusts it to arrive at net cash provided by operating activities.

2. Direct Method: It shows directly the cash receipts and payments from operations of the business. Some T-accounts are prepared in this method to arrive at the cash flows.

Investing Activity shows the inflow and outflow of Cash due to sale or purchase of Assets and/or Investments. Example: Purchase of Fixed Asset, Sale of Investments.

Financing Activity shows flow of Cash from Issuance or buy-back of Shares, redemption of debentures etc.

To State:

Cash Flow Statement using Spreadsheet.

Answer to Problem 4APSA

Solution:

The Cash Flow Statement using Spreadsheet in the books of Forten Company is as follows:

Spreadsheet of Statement of Cash Flow - Indirect Method
Forten Company
Spreadsheet for Statement of Cash Flow
	for the year ended decemebr 31, 2017
Part- A Balance Sheet	Balance as on 12/31/2016	Transaction Analysis				Balance as on 12/31/2017
			Debit	Credit
Cash	73,500			23,700	(m)	49,800
Accounts Receivable	50,625	(b)	15,185			65,810
Inventory	251,800	(c )	23,856			275,656
Prepaid Expenses	1,875			625	(d)	1,250
Equipment	108,000	(h)	96,375	46,875	(g)	157,500
Accumulated Depreciation- Equipment	-46,000	(g)	30,125	20,750	(f)	-36,625
Total Assets	439,800					513,391
Accounts Payable	114,675	(e )	61,534			53,141
Short Term Notes Payable	6,000			4,000	(i)	10,000
Lond Term Notes Payable	48,750	(j)	50,125	66,375	(h)	65,000
	169,425					128,141
Common Stock, $5 par value	150,250			12,500	(k)	162,750
Paid in Capital in excess of par common stock	-			37,500	(k)	37,500
Retained Earnings	120,125	(l)	50,100	14,975	(a)	185,000
Total Liabilities & Stockholder's equity	439,800					513,391
Part- B Statement of Cash Flow
Cash Flows from Operating Activities:			$	$
Net Income		(a)	114,975
Adjustments:
Depreciation Expense		(f)	20,750
Loss on Sale of Equipment		(g)	5,125
Increase in Accounts Receivable				15,185	(b)
Increase in Inventory				23,856	(k)
Decrease in Prepaid Expenses		(d)	625
Decrease in Accounts Payable				61,534	( e)
Net Cash provided by Operating Activities (A)
Cash Flows from Investing Activities:
Cash Receipt from Sale of Equipment		(g)	11,625
Cash Payment for Acquisition of Equipment				30,000	(h)
Net Cash used for Investing Activities (B)
Cash Flows from Financing Activities:
Cash Payment of Long-Term Notes Payable				50,125	(j)
Cash Receipt through Short-Term Notes Payable		(i)	4,000
Cash Payment of Dividend				50,100	(l)
Cash Receipt from Issuance of Common Stock		(k)	50,000
Net Cash used for Financing Activities ( C)
Total Change in Cash & Cash Equivalent			534,400
Add: Amount of Note Payable for Equipment			66,375
TOTAL			600,775

Explanation of Solution

Explanation: The listing of transaction analysis provided on the spreadsheet using indirect method is as follows:

a. Net income of $114,975 is the first operating cash inflow. Net income is entered on the spreadsheet on the debit side of Cash Flow from Operating Activities ( Panel-B ) and on the credit side of Retained Earnings ( Panel-A ).

b. Entry (b) debits Accounts Receivable for it's $15,185 increase during the year. This amount is credited to Increase in Accounts Receivable under operating cash flows.

c. In this entry, Merchandise Inventory is debited for it's $23,856 increase during the year. This amount is credited to Increase in Merchandise Inventory under operating cash flows.

d. Here, Prepaid Expenses are credited for it's $625 decrease during the year. This amount is debited to Decrease in Prepaid Expenses under operating cash flows.

e. This entry debits Accounts Payable for it's $61,534 decrease during the year. This amount is credited to show as Decrease in Accounts Payable under operating cash flows.

f. Net income is adjusted with depreciation of $20,750 which is debited to Depreciation Expense-Equipment under cash flow from operations and credited to Accumulated Depreciation-Equipment.

g. This transaction is the sale of equipment. The $5,125 loss on the sale is entered as a debit to Loss on Disposal of Equipment - an addition to the net income - under operating cash flows. This debit removes $5,125 loss from the operating activities because the cash proceeds from the sale were $11,625 , not $5,125. The $11,625 sale amount is then entered on the spreadsheet under investing activities. Entry (g) is completed by crediting the Equipment cost of $46,875 to the Equipment Account and debiting the Accumulated Depreciation - Equipment for $30,125.

h. This entry debits Equipment for the purchase of $96,375, credits long-term note payable by $66,375 and credits cash payment for Acquisition of Equipment by $30,000 under investing cash flows. Here, cash flows are credited by only $30,000 because cash payment is made to the extent of $30,000 only. Issuance of long-term note payable for the balance amount is a non-cash financing activity.

i. In this entry, there is a credit to Short- Term Notes Payable and a debit under cash flow from financing activities of $4,000. ( Cash receipts from issuance of Short-Term Notes Payable )

j. This entry is the opposite of above entry. Here, we debit Long-Term Notes Payable and credit cash flow from financing activities for Cash Payment of Long-Term Notes Payable of $50,125.

k. This entry is represented by a debit under cash flow from financing activities and a simultaneous credit to Common Stock towards Cash Receipts from Issuance of Common Stock of $50,000.

l. Here, we debit the Retained Earnings and at the same time we show Cash Payments of Dividends as a credit under cash flow from financing activities amounting to $50,100.

m. The Net Decrease in Cash & Cash Equivalents is represented by (m) $23,700. The same amount is credited to Cash Account showing the decrease in cash.

Conclusion

Conclusion:

The Cash Flow Statement using the spreadsheet in the books of Forten Company is given above.