Chapter 16, Problem 7APSA

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 7APSA

Solution:

The Cash Flow Statement using Spreadsheet in the books of Golden Corporation for the year ending December 31, 2017 is as follows:

Spreadsheet of Statement of Cash Flow - Indirect Method
Golden Corporation
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	107,000	(j)	57,000			164,000
Accounts Receivable	71,000	(b)	12,000			83,000
Inventory	526,000	(c )	75,000			601,000
Equipment	299,000	(g)	36,000			335,000
Accumulated Depreciation- Equipment	-104,000			54,000	(f)	-158,000
Total Assets	899,000					1,025,000
Accounts Payable	71,000			16,000	(d)	87,000
Income Tax Payable	25,000			3,000	(e )	28,000
	96,000					115,000
Common Stock, $5 par value	568,000			24,000	(h)	592,000
Paid in Capital in excess of par common stock	160,000			36,000	(h)	196,000
Retained Earnings	75,000	(i)	89,000	136,000	(a)	122,000
Total Liabilities & Stockholder's equity	899,000					1,025,000
Part- B Statement of Cash Flow
Cash Flows from Operating Activities:			$	$
Net Income		(a)	136,000
Adjustments:
Depreciation Expense		(f)	54,000
Increase in Accounts Receivable				12,000	(b)
Increase in Inventory				75,000	(c )
Increase in Accounts Payable		(d)	16,000
Increase in Income Tax Payable		(e )	3000
Net Cash provided by Operating Activities (A)
Cash Flows from Investing Activities:
Cash Payment for Acquisition of Equipment				36,000	(g)
Net Cash used for Investing Activities (B)
Cash Flows from Financing Activities:
Cash Receipt from Issuance of Common Stock		(h)	60000
Cash Payment of Dividend				89,000	(i)
Net Cash used for Financing Activities ( C)
Total Change in Cash & Cash Equivalent			538000	481000

Explanation of Solution

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

a. Net income of $136,000 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 $12,000 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 $75,000 increase during the year. This amount is credited to Increase in Merchandise Inventory under operating cash flows.

d. This entry credits Accounts Payable for it's $16,000 increase during the year. This amount is debited to show as Increase in Accounts Payable under operating cash flows.

e. This entry credits Income Taxes Payable for it's $3,000 increase during the year. This amount is debited to show as Increase in Income Taxes Payable under operating cash flows.

f. Net income is adjusted with depreciation of $54,000 which is debited to Depreciation Expense-Equipment under operating cash flows and credited to Accumulated Depreciation-Equipment.

g. This entry debits Equipment for the purchase of $36,000,credits cash payment for Acquisition of Equipment with the same amount under investing cash flows.

h. 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 $60,000.

i. 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 $89,000.

j. The Net Increase in Cash & Cash Equivalents is represented by (j) $57,000. The same amount is debited to Cash Account showing the increase in cash.

Conclusion

Conclusion:

The Cash Flow Statement using spreadsheet in the books of Golden Corporation using spreadsheet is given above.