Chapter 21, Problem 21.3P

(1)

To determine

Statement of cash flows: This statement reports all the cash transactions which are responsible for inflow and outflow of cash, and result of these transactions is reported as the ending balance of cash at the end of the accounting period.

Direct method:

This method uses the basis of cash for preparing the cash flows of statement.

Operating activities:

Operating activities refer to the normal activities of a company to carry out the business. The examples for operating activities are purchase of inventory, payment of salary, sales, and others.

Investing activities:

Investing activities refer to the activities carried out by a company for acquisition of long term assets. The examples for investing activities are purchase of equipment, long term investment, sale of land, and others.

Financing activities:

Financing activities refer to the activities carried out by a company to mobilize funds to carry out the business activities. The examples for financing activities are purchase of bonds, issuance of common shares, and others.

To prepare: A spreadsheet for the preparation of thestatement of cash flow of NI Company under direct method for the year ended December 31, 2018.

Explanation of Solution

Spreadsheet:

The spreadsheet is a supplementary device which helps to prepare the adjusting entries and the statement of cash flows easier.  The spreadsheet is a working tool of the accountant but it is not a permanent accounting record.

Spreadsheet for the Statement of cash flows of NI Company: 

NI Company
Spreadsheet for the Statement of Cash Flows
Amount in Millions
Particulars	December 31,2017 Amount ($)	Changes		December 31,2018 Amount ($)
		Debit ($)	Credit ($)
Assets
Assets
Cash	55	(18) 2		57
Accounts receivable	170	(1) 11		181
Less: Allowance	(6)		(1) 2	(8)
Prepaid insurance	12		(8) 5	7
Inventory	165	(4) 5		170
Long term investment	90	(2) 6	(3) 30	66
Land	150			150
Buildings and equipment	270	(13) 80   X	(10) 60	290
Less: Acc. depreciation	(75)	(10) 15	(6) 25	(85)
Trademark	25		(7) 1	24
Total assets	856			852
Liabilities and Stockholders’ Equity
Liabilities
Accounts payable	45	(4) 15		30
salaries payable	8	(5) 5		3
Deferred tax liability	15		(11) 3	18
Lease liability	0	(13) 12	X (13) 80	68
Bonds payable	275	(14) 130		145
Less: Discount	(25)		(9) 3	(22)
Stockholders’ equity
Common Stock	290		(15) 20	310
Paid in capital –ex of par	85		(15) 10	95
Preferred stock	0		(16) 50	50
Retained Earnings	163	(17) 30	(12) 22	155
Total liabilities and stockholders’ equity	856			852
Income Statement
Revenues
Sales revenue			(1) 320	320
Investment revenue			(2) 15	15
Gain on sale of investments			(3) 5	5
Expenses
Cost of goods sold		(4) 125		(125)
Salaries expense		(5) 55		(55)
Depreciation expense		(6) 25		(25)
Trademark amortization		(7) 1		(1)
Bad debt expense		(1) 7		(7)
Insurance expense		(8) 13		(13)
Bond Interest expenses		(9) 30		(30)
Loss on building fire		(10) 42		(42)
Income tax expense		(11) 20		(20)
Net income		(12) 22		22
Statement of Cash Flows
Operating activities:
Cash Inflows:
From customers		(1) 304
From investment revenue		(2) 9
Cash Outflows:
To suppliers of goods			(4) 145
To employees			(5) 60
For insurance			(8) 8
For bond interest			(9) 27
For income taxes			(11) 17
Net cash flows				56
Investing activities:
Sale of long term investment		(3) 35
Sale of building parts		(10) 3
Net cash flows				38
Financing activities:
Payment on lease liability			(13) 12
Retirement of bonds payable			(14) 130
Sale of common stock		(15) 30
Sale of preferred stock		(16) 50
Payment of cash dividends			(17) 30
Net cash flows				(92)
Net increase in cash			(18) 2	2
Total		1,082	1,082

Table (1)

Note (X):

Purchase $80 million worth of equipment by 7-year lease is considered as non cash investing and financing activities.

(2)

To determine

To prepare: The statement of cash flows.

Explanation of Solution

The spreadsheet of NI Company shows the analysis of cash flows in the reporting year 2018.

NI Company
Spreadsheet for the statement of cash flows
Year ended December 31, 2018
	Changes
Details (December 31, 2017)	Debits ($)	Credits ($)	December 31, 2018
Statement of cash flows
Operating activities:
Cash inflows:
From customers	304
From investment revenue	9
Cash outflows:
To suppliers of goods		(145)
To employees		(60)
For insurance expense		(8)
For bond interest expense		(27)
For income taxes		(17)
Net cash flows from operating activities			56
Investing activities:
Sale of long-term investment	35
Sale of building parts	3
Net cash flows from investing activities			38
Financing activities:
Payment on lease liability		(12)
Retirement of bonds payable		(130)
Sale of common stock	30
Sale of preferred stock	50
Payment of cash dividends		(30)
Net cash flow from financing activities			(92)
Net increase in cash			2
Cash balance, January 1			55
Cash balance, December 31			57

Table (2)

Conclusion

Hence, the opening cash balance is $55 and the closing cash balance is $57.