Chapter 21, Problem 21.27E

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)

To Prepare: The statement of cash flows of Company R.

Answer to Problem 21.27E

Company R
Spreadsheet for the Statement of Cash Flows
Amount in Millions
Particulars	December 31,2015 Amount ($)	Changes		December 31,2016 Amount ($)
		Debit ($)	Credit ($)
Assets
Current Assets
Cash	$110		(11)  $86	$24
Accounts receivable	$132	(1)  $46		$178
Prepaid Insurance	$3	(4)  $4		$7
Inventory	$175	(2)  $110		$285
Buildings and equipment	$350	(6)  $230	(7) $180	$400
Land	($240)	(7)  $171	(3)  $50	-$119
Total current assets	$530			$775
Liabilities and Stockholders’ Equity
Liabilities
Accounts payable	$100	(2) $13		$87
Accrued expenses payable	$11	(4) $5		$6
Notes payable	$0		(8)  $50	$50
Bonds payable	$0		(10)  $160	$160
Stockholders’ equity
Common Stock	$400			$400
Retained Earnings	$19	(6)  $50	(7) $103	$72
Total liabilities and stockholders’ equity	$530			$775
Income Statement
Revenues
Sales revenue			(1) $2,000	$2,000
Expenses
Cost of goods sold		(2) $1,400		$1,400
Depreciation expense		(3)  $50		$50
Operating expenses		(4)  $447		$447
Net income		(5)  $103		$103
Statement of Cash Flows
Operating activities:
Cash Inflows:
From customers		(1) $1,954
Cash Outflows:
To suppliers of goods			(2) $1,523
For operating expenses			(4) $456
Net cash flows				($25)
Investing activities:
Sale of equipment		(7)  $9
Purchase of equipment			(6)  $230
Net cash flows				($221)
Financing activities:
Issuance of note payable		(8)  $50
Issuance of bonds payable		(10)  $160
Payment of cash dividends			(9)  $50
Net cash flows				$160
Net decrease in cash		(11)  $86		($86)
Total		$4,888	$4,888

Table (4)

The spreadsheet of Company R shows the analysis of cash flows in the reporting year 2016.

Company R
Statement of Cash Flows
Amount in Millions
Particulars	Amount ($)	Amount ($)
Operating activities:
Cash Inflows:
From customers	$1,954
Cash Outflows:
To suppliers of goods	($1,523)
For operating expenses	($456)
Net cash used from operating activities		($25)
Investing activities:
Sale of equipment	($230)
Purchase of equipment	$9
Net cash used from investing activities		($221)
Financing activities:
Issuance of note payable	$50
Issuance of bonds payable	$160
Payment of cash dividends	($50)
Net cash provided by financing activities		$160
Net decrease in cash		($86)
Cash balance, January 1, 2016		$110
Cash balance, December 31, 2016		$24

Table (5)

Explanation of Solution

Working notes:

Calculate the amount of received from customer:

$\begin{array}{c}\begin{array}{l}\text{Cash}\text{receipts}\\ \text{from}\text{Customers}\end{array}]=\text{Sales}\text{revenue }\left(\begin{array}{l}+\text{Decrease in Accounts Receivable}\\ \text{OR}\\ -\text{Increase in Accounts Receivable}\end{array}\right)\\ =\text{Sales revenue }-\text{Increase in accounts receivables}\\ =\$2,000-\$46\\ =\$1,954\end{array}$

Calculate the amount of cash paid to suppliers of goods:

$\begin{array}{c}\left(\begin{array}{l}\text{Cash}\text{paid }\\ \text{to }\text{Suppliers}\end{array}\right)=\text{Cost of Goods Sold }\left(\begin{array}{l}+\text{Decrease in Accounts Payable}\\ \text{/}\text{Increase in Inventory}\\ \text{OR}\\ -\text{Increase in Accounts Payable }\\ \text{/}\text{Decrease in Inventory}\end{array}\right)\\ =\left(\begin{array}{l}\text{Cost of goods sold + Decrease in accounts payable}\\ \text{ + Increase in inventory}\end{array}\right)\\ =\$1,400+\$13+\$110\\ =\$1,523\end{array}$

Calculate the amount of cash paid for operating expenses:

$\begin{array}{c}\left(\begin{array}{l}\text{Cash paid for }\\ \text{Operating expenses}\end{array}\right)=\text{Operating expenses}\left(\begin{array}{l}\text{+Increase in prepaid of insurance}\\ \text{+Decrease in other }\\ \text{accrued liabilities}\end{array}\right)\\ =\text{Operating expense +}\left(\begin{array}{l}\text{Increase in prepaid insurance+}\\ \text{Decrease in accrued expense payable}\end{array}\right)\\ =\$447+\$4+5\\ =\$447+\$4+\$5\\ =\$456\end{array}$

Calculate the amount of  proceeds  from sale of equipment:

$\begin{array}{c}\text{Sale of equipment = }\left(\begin{array}{l}\text{Purchase of equipment}-\\ 95\%depreciationofthatequipment\end{array}\right)\\ =\$180-\$171\\ =\$9\end{array}$

Conclusion

The statement of cash flows of Company R shows opening balance of cash flows in the reporting year 2016 as $110 million and the closing balance of cash as $24 million.