Chapter 21, Problem 21.2P

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: Statement of cash flow of W company for the year ended December 31, 2016 under direct method.

Answer to Problem 21.2P

W Company
Statement of Cash Flows (Direct Method)
Year Ended December 31, 2016
Details	Amount in ($000)	Amount in ($000)
Cash flows from operating activities:
Cash inflows:
From customers	382
Total cash receipts		382
Cash outflows:
To suppliers of goods	(142)
To employees	(48)
For interest	(10)
For income taxes	(73)
Total cash payments		(273)
Net cash flows from operating activities		109
Cash flows from investing activities:
Sale of land	7
Purchase of short-term investment	(25)
Purchase of equipment	(150)
Net cash flows from investing activities		(168)
Cash flows from financing activities:
Repayment of note payable	(30)
Sale of bonds payable	60
Sale of common stock	76
Payment of cash dividends	(35)
Net cash flows from financing activities		71
Net increase in cash		12
Cash balance, January 1,		30
Cash balance, December 31		42

Table (4)

Explanation of Solution

Working notes:

Calculate the amount of cash received from customers:

$\begin{array}{c}\text{Cash received from customers = }\left[\begin{array}{l}\text{Sales revenue + }\\ \left(\begin{array}{l}\text{Accounts receivable in 2015}-\\ \text{Accounts receivable in 2016}\end{array}\right)\end{array}\right]\\ =\left[\$380+\left(\$75-\$73\right)\right]\\ =\$382\end{array}$

Calculate the amount of suppliers of goods:

$\begin{array}{c}\text{Suppliers of goods = }\left(\begin{array}{l}\text{Cost of goods sold + }\\ \left(\begin{array}{l}\text{Inventory in 2016}-\\ \text{Inventory in 2015}\end{array}\right)\\ \text{ + }\left(\begin{array}{l}\text{Accounts payable in 2015}\\ -\text{Accounts payable in 2016}\end{array}\right)\end{array}\right)\\ =\left[\$130+\left(\$75-\$70\right)+\left(\$35-\$28\right)\right]\\ =\$130+\$5+\$7\\ =\$142\end{array}$

Calculate the amount of employee expenses:

$\begin{array}{c}\text{Employee expenses = }\left[\begin{array}{c}\text{Salaries expense +}\\ \left(\begin{array}{l}\text{Salaries payable in 2015}-\\ \text{Salaries payable in 2016}\end{array}\right)\end{array}\right]\\ =\left[\$45+\left(\$5-\$2\right)\right]\\ =\$45+\$3\\ =\$48\end{array}$

Calculate the amount of interest expense:

$\begin{array}{c}\text{Interest expense = }\left[\begin{array}{l}\text{Interest expense}-\\ \left(\begin{array}{l}\text{Interest payable in 2016}-\\ \text{Interest payable in 2015}\end{array}\right)\end{array}\right]\\ =\left[\$12-\left(\$5-\$3\right)\right]\\ =\$12-\$2\\ =\$10\end{array}$

Calculate the amount of income taxes:

$\begin{array}{c}\text{Income taxes = }\left[\begin{array}{l}\text{Income tax expense +}\\ \left(\begin{array}{l}\text{Income tax payable in 2015}\\ -\text{Income tax payable in 2016}\end{array}\right)\end{array}\right]\\ =\left[\$70+\left(\$12-\$9\right)\right]\\ =\$70+\$3\\ =\$73\end{array}$

Calculate the amount of sale of land:

$\begin{array}{c}\text{Sale of land = }\left[\begin{array}{l}\left(\text{Land in 2015}-\text{Land in 2016}\right)\\ -\text{Loss on sale of land}\end{array}\right]\\ \text{=}\left[\left(\$60-\$50\right)-\$3\right]\\ =\$10-\$3\\ =\$7\end{array}$

Calculate the amount of Short-term investment:

$\begin{array}{c}\text{Short- term investment = }\left(\begin{array}{l}\text{Short-term investment in 2016}-\\ \text{Short-term investment in 2015}\end{array}\right)\\ =\left(\$40-\$15\right)\\ =\$25\end{array}$

Calculate the amount of equipment:

$\begin{array}{c}\text{Equipment = }\left(\begin{array}{l}\text{Equipment in 2016}\\ -\text{Equipment in 2015}\end{array}\right)\\ =\$550-\$400\\ =\$150\end{array}$

Calculate the amount of bonds payable:

$\begin{array}{c}\text{Bonds payable =}\left(\begin{array}{l}\text{Bonds payable in 2016}-\\ \text{Bonds payable in 2015}\end{array}\right)\\ =\$160-\$100\\ =\$60\end{array}$

Calculate the amount of common stock:

$\begin{array}{c}\text{Common stock = }\left[\begin{array}{l}\left(\text{Common stock in 2016}-\text{Common stock in 2015}\right)\\ +\left(\text{Paid in capital in 2016}-\text{Paid in capital in 2015}\right)\end{array}\right]\\ =\left(\$250-\$200\right)+\left(\$126-\$100\right)\\ =\$50+\$26\\ =\$76\end{array}$

Note: Amounts of $35,000 were paid to shareholders.

Conclusion

Hence, the opening cash balance is $30 and closing cash balance is $42.