Chapter 21, Problem 18E

Spreadsheet and Statement The following 2019 information is available for Stewart Company:

Partial additional information:

• The equipment that was sold for cash had cost $400 and had a book value of $300.
• Land that was sold brought a cash price of $530.
• Fifty shares of stock were issued at par.

(Appendix 21.1) Operating Cash Flows Spreadsheet Method Refer to the information for Stewart Company in E21-11.

Required:

Raised only on the information presented and using the direct method, prepare the cash flows from operating activities section of the 2019 statement of cash flows for Stewart using the spreadsheet method.

To determine

Prepare operating activities section in the cash flow statement under direct method of S Company for the year 2019.

Explanation of Solution

Prepare operating activities section in the cash flow statement under direct method:

Table (1)

Table (2)

Working Note:

(a) Net income for the year ended 2019 is $1,140.

(b) Calculate the decrease in accounts receivable.

$\begin{array}{l}\begin{array}{c}\text{Decrease in accounts receivable = }\left(\begin{array}{l}\text{opening accounts receivable}\\ \text{ – closing accounts receivable}\end{array}\right)\\ \text{= \$450- \$310}\\ \text{=\$140}\end{array}\hfill \\ \hfill \end{array}$

(c) Calculate an increase in inventory.

$\begin{array}{c}\text{Increase in inventory = Closing inventory - opening inventory}\\ \text{=\$450-\$310}\\ =\$50\end{array}$

(d) Calculate the cost of land sold.

$\begin{array}{c}\text{Cost of land sold = }\left(\begin{array}{l}\text{Proceeds from sale of land }\\ \text{- Gain on sale of land}\end{array}\right)\\ =\$530-\$400\\ =\$130\end{array}$

(e) Calculate the purchase of land.

Step 1: Calculate the balance amount of land after sale.

$\begin{array}{c}\begin{array}{l}\text{Balance amount of land }\\ \text{after sales}\end{array})=\left\{\begin{array}{l}\text{Opening balance}\\ -\text{Sale of land}\end{array}\right\}\\ =\$300-\$130\\ =\$170\end{array}$

Step 2: Calculate the purchase of land.

$\begin{array}{c}\text{Purchase of land = }\left(\begin{array}{l}\text{Closing balance}\\ -\text{Balance amount of land }\\ \text{after sale}\end{array}\right)\\ =\$500-\$170\\ =\$330\end{array}$

(f) Calculate the Proceeds from Equipment.

$\begin{array}{c}\text{Proceeds from sale of equipment = Book value }-\text{Selling cost}\\ \text{=\$300}-\$260\\ =\$40\end{array}$

(g) Calculate the Purchase of equipment.

Step 1: Calculate the balance amount of equipment after sales.

$\begin{array}{c}\begin{array}{l}\text{Balance amount of equipment }\\ \text{after sales}\end{array})=\left\{\begin{array}{l}\text{Opening balance}\\ -\text{Sale of equipment}\end{array}\right\}\\ =\$1,600-\$400\\ =\$1,200\end{array}$

Step 2: Calculate the purchase of equipment.

$\begin{array}{c}\text{Purchase of Equipment = }\left(\begin{array}{l}\text{Closing balance}\\ -\text{Balance amount of equipment }\\ \text{after sale}\end{array}\right)\\ =\$1,800-\$1,200\\ =\$600\end{array}$

(h) Calculate the Depreciation expense.

$\begin{array}{c}\text{Depreciation Expenses = }\left(\begin{array}{l}\text{Opening accumulated depreciation}\\ -\text{ Closing accumulated depreciation}\end{array}\right)\\ =\$200-\$150\\ =\$50\end{array}$ 

(i) Calculate an increase in accounts payable.

$\begin{array}{c}\text{Increase in accounts payable = }\left(\begin{array}{l}\text{Closing balance of accounts payable}\\ -\text{Opening balance of accounts payable}\end{array}\right)\\ \text{=\$750}-\$600\\ =\$150\end{array}$

(j) Calculate the proceeds from issuance of common stock.

$\begin{array}{c}\text{Proceeds from issuance of common stock = Number of share}\times \text{Value of share}\\ =50\times \$10\\ =\$500\end{array}$

(k) Calculate the payment of dividend.

Step 1: Calculate the amount of retained earnings.

$\begin{array}{c}\text{Increase in retained earnings =}\left(\begin{array}{l}\text{Closing retained earning}\\ -\text{ Opening retained earning}\end{array}\right)\\ \text{=\$840}-\$700\\ =\$140\end{array}$

Step 2: Calculate the amount of dividend paid.

$\begin{array}{c}\text{Payment of dividend = Net income}-\text{Increase in retained earnings}\\ \text{=\$1,140}-\$140\\ =\$1,000\end{array}$

(I) Calculate the net increase in cash.

$\begin{array}{c}\text{Increase in cash =}\left(\begin{array}{l}\text{Closing cash balance}\\ -\text{ Opening cash balance}\end{array}\right)\\ =\$1,130-\$700\\ =\$430\end{array}$

Table (3)

Working note 1:

Calculate the collection from customers.

$\begin{array}{c}\text{Cash collection from customers}=\text{}\left\{\begin{array}{l}\text{Sales revenue}\\ \left(\begin{array}{c}+\text{Decrease in accounts receivable}\\ \text{ or }\\ -\text{Increase in accounts receivable}\\ +\text{Increase in deferred revenues}\\ \text{or}\\ -\text{Decrease in deferred revenue}\end{array}\right)\end{array}\right\}\\ =\left(\text{Sales revenue}+\text{ Decrease in accounts receivable}\right)\\ =\$9,000+\$140\\ =\$9,140\end{array}$

Working note 2:

Calculate the payments to suppliers.

$\begin{array}{c}\text{Payments}\text{made}\text{to}\text{suppliers}=\left\{\begin{array}{l}\text{Cost of goods sold }\\ +\text{Increase}\text{in}\text{inventory}\\ \text{ or}\\ +\text{Decrease in accounts payable}\\ -\text{Decrease in inventory}\\ \text{ or}\\ -\text{Increase in accounts payable}\end{array}\right\}\\ =\left(\begin{array}{l}\text{Cost of goods sold }\\ \text{+ Increase in inventory}\\ -\text{Increase in accounts payable}\end{array}\right)\\ =\$6,000+\$50-\$150\\ =\$5,900\end{array}$

Working note 3:

Calculate the other operating payments.

$\begin{array}{c}\text{Other Operating Payments}=\left(\begin{array}{l}\text{Other expenses}\\ +\text{Increase in prepaid items}\\ \text{-Decrease in prepaid items}\\ \text{-Depreciation,depletion,}\\ \text{and amortization expenses}\\ \text{-Losses on disposals of assets and liabilities}\\ \text{-Investment loss (equity method)}\end{array}\right)\\ =\left(\begin{array}{l}\text{Other operating expenses }\\ -\text{Depreciation expenses}\end{array}\right)\\ =\$2,000-\$50\\ =\$1,950\end{array}$

Accumulated depreciation decreased by $50($200-$150) in total, caused by a $100 decreased due to the sale of equipment with a $400 cost and a $300 book value and a $50 increase due to depreciation expenses.

Conclusion

Therefore, the net cash provided by operating activities is $1,290.