Chapter 21, Problem 21.19P

To determine

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.

Direct method: The direct method uses the cash basis of accounting for the preparation of the statement of cash flows. It takes into account those revenues and expenses for which cash is either received or paid.

Cash flows from operating activities: Cash flows from operating activity represent the net cash flows from the general operation of the business by comparing the cash receipt and cash payments.

Cash Receipts: It encompasses all the cash receipts from sale of goods and on account receivable.

Cash Payments: It encompasses all the cash payments that are made to suppliers of goods and all expenses that are paid.

The below table shows the way of calculation of cash flows from operating activities:

Cash flows from operating activities (Direct method)

Add: Cash receipts.

Cash receipt from customer

Less: Cash payments:

To supplier

For operating expenses

Income tax expenses

Net cash provided from or used by operating activities

Table (1)

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

Deduct: Purchase of fixed assets/long-lived assets

Purchase of marketable securities

Net cash provided from or used by investing activities

Table (2)

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 (3)

T-Account: For all the business transactions, journal entries are passed and are transferred to the respective ledger accounts where it is recorded and summarized in either side of the ‘T’ format.

To Prepare: T-account for balance sheet account of D Company for the year ended December 31, 2016.

Explanation of Solution

Cash Account: (all amounts are in 000s)

Cash Account
Date	Details	Debit ($)		Date	Details	Credit ($)
December 31, 2016	Operatingactivities:			December 31, 2016	Operatingactivities:
	From customers	203			To suppliers of goods	132
	From dividend received	2			To employees	28
					For interest	5
					For income taxes	18
	Investing activities:				Investing activities:
	Sale of building	7			Purchase of long-term investment	5
					Purchase of equipment	15
	Financing activities:				Financing activities:
	Sale of bonds payable	25			Payment of dividends	13
					Purchase of treasury stock	8
	Balance	13

Table (4)

Accounts Receivable:

Accounts Receivable Account
Date	Details	Debit ($)		Date	Details	Credit ($)
				December 31, 2016	Decrease in accounts receivable	3
					Balance	3

Table (5)

Inventory:

Inventory Account
Date	Details	Debit ($)		Date	Details	Credit ($)
December 31, 2016	Increase in inventory	5
	Balance	5

Table (6)

Dividend Receivable:

Dividend ReceivableAccount
Date	Details	Debit ($)		Date	Details	Credit ($)
December 31, 2016	Increase in dividend receivable	1
	Balance	1

Table (7)

Long-Term Investment:

Long-Term InvestmentAccount
Date	Details	Debit ($)		Date	Details	Credit ($)
December 31, 2016	Increase in long-term investment	5
	Balance	5

Table (8)

Land:

Land Account
Date	Details	Debit ($)		Date	Details	Credit ($)
December 31, 2016	Increase in land	30
	Balance	30

Table (9)

Building and Equipment:

Building and Equipment Account
Date	Details	Debit ($)		Date	Details	Credit ($)
				December 31, 2016	Decrease in building and equipment	25
December 31, 2016	Purchase of equipment	15			Balance	40

Table (10)

Accumulated Depreciation:

Accumulated Depreciation Account
Date	Details	Debit ($)		Date	Details	Credit ($)
December 31, 2016	Accumulated depreciation	25
	Depreciation	30		December 31, 2016	Balance	5

Table (11)

Accounts Payable:

Accounts Payable Account
Date	Details	Debit ($)		Date	Details	Credit ($)
December 31, 2016	Decrease in accounts payable	7
	Balance	7

Table (12)

Salary Payable:

Salary Payable Account
Date	Details	Debit ($)		Date	Details	Credit ($)
December 31, 2016	Decrease in salary payable	3
	Balance	3

Table (13)

Interest Payable:

Interest Payable Account
Date	Details	Debit ($)		Date	Details	Credit ($)
				December 31, 2016	Increase in interest payable	2
					Balance	2

Table (14)

Income Tax Payable:

Income Tax PayableAccount
Date	Details	Debit ($)		Date	Details	Credit ($)
December 31, 2016	Decrease in income tax payable	1
	Balance	1

Table (15)

Notes Payable:

Notes Payable Account
Date	Details	Debit ($)		Date	Details	Credit ($)
				December 31, 2016	Notes payable	30
					Balance	30

Table (16)

Bonds Payable:

Bonds Payable Account
Date	Details	Debit ($)		Date	Details	Credit ($)
				December 31, 2016	Bonds payable	25
					Balance	25

Table (17)

Discount on Bonds:

Discount on BondsAccount
Date	Details	Debit ($)		Date	Details	Credit ($)
				December 31, 2016	Discount on bond	1
					Balance	1

Table (18)

Common stock:

Common stock Account
Date	Details	Debit ($)		Date	Details	Credit ($)
				December 31, 2016	Common stock	10
					Balance	10

Table (19)

Paid-in Capital:

Paid-in Capital Account
Date	Details	Debit ($)		Date	Details	Credit ($)
				December 31, 2016	Paid-in capital	4
					Balance	4

Table (20)

Retained Earnings:

Retained Earnings Account
Date	Details	Debit ($)		Date	Details	Credit ($)
December 31, 2016	Balance of retained earnings	2		December 31, 2016
	Payment of cash dividend	13			Balance	25
	Retained earning	14

Table (21)

Treasury Stock:

Treasury Stock Account
Date	Details	Debit ($)		Date	Details	Credit ($)
December 31, 2016	Treasury stock	8
	Balance	8

Table (22)

Sales:

Sales Account
Date	Details	Debit ($)		Date	Details	Credit ($)
				December 31, 2016	Sales revenue	200
					Balance	200

Table (23)

Dividend Revenue:

Dividend RevenueAccount
Date	Details	Debit ($)		Date	Details	Credit ($)
				December 31, 2016	Dividend revenue	3
					Balance	3

Table (24)

Cost of Goods Sold:

Cost of Goods Sold Account
Date	Details	Debit ($)		Date	Details	Credit ($)
December 31, 2016	Cost of Goods Sold	120
	Balance	120

Table (28)

Salaries Expense:

Salaries ExpenseAccount
Date	Details	Debit ($)		Date	Details	Credit ($)
December 31, 2016	Salaries Expense	25
	Balance	25

Table (29)

Depreciation Expense:

Depreciation Expense Account
Date	Details	Debit ($)		Date	Details	Credit ($)
December 31, 2016	Depreciation Expense	5
	Balance	5

Table (30)

Bad debt Expense:

Bad debt Expense Account
Date	Details	Debit ($)		Date	Details	Credit ($)
December 31, 2016	Bad debt Expense	3
	Balance	3

Table (31

Interest Expense:

Interest ExpenseAccount
Date	Details	Debit ($)		Date	Details	Credit ($)
December 31, 2016	InterestExpense	8
	Balance	8

Table (32)

Loss on Sale of Building:

Loss on Sale of BuildingAccount
Date	Details	Debit ($)		Date	Details	Credit ($)
December 31, 2016	Loss on sale of building	3
	Balance	3

Table (33)

Income Tax Expense:

Income Tax Expense Account
Date	Details	Debit ($)		Date	Details	Credit ($)
December 31, 2016	Income Tax Expense	17
	Balance	17

Table (34)

Net income (income summary):

Net Income (income summary)Account
Date	Details	Debit ($)		Date	Details	Credit ($)
December 31, 2016	Net income	25
	Balance	25

Table (35)

To determine

To Prepare: The statement of cash flows using direct method for D Company for the year ended December 31, 2016.

Answer to Problem 21.19P

Figure (1)

Explanation of Solution

Working notes:

Calculate the amount of cash received from customers:

$\begin{array}{c}\begin{array}{l}\text{Cash}\text{receipts}\\ \text{from}\text{Customers}\end{array}]=\text{Sales}\text{revenue }\left(\begin{array}{l}+\text{Decrease in Accounts Receivable}\\ \text{OR}\\ -\text{Increase in Accounts Receivable}\end{array}\right)\\ =\text{Sales revenue + Decrease in accounts receivables}\\ =\$200+\$3\\ =\$203\end{array}$

Calculate the amount of dividend received:

$\begin{array}{c}\text{Dividend received}=\text{Dividend revenue }\left(\begin{array}{l}+\text{Decrease in Dividend Receivable}\\ \text{OR}\\ -\text{Increase in Devidend Receivable}\end{array}\right)\\ =\text{Dividend revenue }-\text{Increase in accounts receivables}\\ =\$3-1\\ =\$2\end{array}$

Calculate the amount of cash paid to suppliers:

$\begin{array}{c}\left(\begin{array}{l}\text{Cash}\text{paid }\\ \text{to }\text{Suppliers}\end{array}\right)=\text{Cost of Goods Sold }\left(\begin{array}{l}+\text{Decrease in Accounts Payable}\\ \text{/}\text{Increase in Inventory}\\ \text{OR}\\ -\text{Increase in Accounts Payable }\\ \text{/}\text{Decrease in Inventory}\end{array}\right)\\ =\left(\begin{array}{l}\text{Cost of goods sold + Decrease in accounts payable}\\ \text{ + Increase in inventory}\end{array}\right)\\ =\$120+\$7+\$5\\ =\$132\end{array}$

Calculate the amount of cash paid to employee expenses:

$\begin{array}{c}\left(\begin{array}{l}\text{Cash paid }\\ \text{of salaries}\end{array}\right)=\text{Salaries expense}\left(\begin{array}{l}+\text{Decrease in salaries payable}\\ \text{OR}\\ -\text{Increase in salaries payable}\end{array}\right)\\ =\text{Salaries expense + Decrease in salaries payable}\\ =\$25+\$3\\ =\$28\end{array}$

Calculate the amount of cash paid for interest expense:

$\begin{array}{c}\left(\begin{array}{l}\text{Cash paid for }\\ \text{ interest }\\ \text{expenses}\end{array}\right)=\text{Interest expenses}-\left(\begin{array}{l}\left[\begin{array}{l}+\text{Decrease in interest payable}\\ \text{OR}\\ -\text{Increase in interest payable}\end{array}\right]-\\ \left[\begin{array}{l}-\text{ Decrease in discount on bonds}\\ +\text{Increase in discount on bonds}\end{array}\right]\end{array}\right)\\ =\left(\begin{array}{l}\text{Interest expense}\\ -\text{Increase in interest payable}-\\ \text{Decrease in discount on bonds}\end{array}\right)\\ =\$8-\$2-\$1\\ =\$5\end{array}$

Calculate the amount of cash paid for income taxes:

$\begin{array}{c}\left(\begin{array}{l}\text{Cash paid }\\ \text{for Income taxes}\end{array}\right)=\text{Income tax expense}\left(\begin{array}{l}+\text{Decrease in income tax payable}\\ \text{OR}\\ -\text{Increase in income tax payable}\end{array}\right)\\ =\left(\text{Income tax expense +Decrease in income tax payable}\right)\\ \text{=\$17+1}\\ =\$18\end{array}$

Calculate the amount of purchaseof long-term investment:

$\begin{array}{l}\text{Ending baalnce =}\left[\begin{array}{l}\left(\text{ Beginning balance + Purchase}\right)\\ -\text{Sales}\end{array}\right]\\ \Rightarrow \begin{array}{l}\text{Purchase of}\\ \text{ long-term }\\ \text{investment}\end{array}\}\text{ =}\left[\begin{array}{l}\left(\text{Ending balance + Sales}\right)\\ -\text{Beginning balance}\end{array}\right]\\ \Rightarrow \begin{array}{l}\text{Purchase of}\\ \text{ long-term }\\ \text{investment}\end{array}\}\text{ = }\left(\$15-\$10\right)\\ \Rightarrow \begin{array}{l}\text{Purchase of}\\ \text{ long-term }\\ \text{investment}\end{array}\}\text{= \$5}\end{array}$

Calculate the amount of proceeds from sale of bonds payable:

$\begin{array}{l}\text{Ending balance =}\left[\begin{array}{l}\left(\text{ Beginning balance + Gain on sale of land}\right)\\ -\text{Sales}\end{array}\right]\\ \Rightarrow \begin{array}{l}\text{Sale of bonds}\\ \text{ payable}\end{array}\}\text{=}\left[\begin{array}{l}\text{Ending balance}\\ -\text{Beginning balance}\end{array}\right]\\ \Rightarrow \begin{array}{l}\text{Sale of bonds}\\ \text{ payable}\end{array}\}\text{=}\left[\$97-\$70\right]\\ \Rightarrow \begin{array}{l}\text{Sale of bonds}\\ \text{ payable}\end{array}\}\text{=}\$25\end{array}$

Conclusion

Hence, the opening cash balance is $20 million and closing cash balance is $33 million.