Chapter 21, Problem 21.4P

Statement of cash flows; direct method

• LO21–3, LO21–8

The comparative balance sheets for 2018 and 2017 and the statement of income for 2018 are given below for Dux Company. Additional information from Dux’s accounting records is provided also.

Additional information from the accounting records:

a. A building that originally cost $40,000, and which was three-fourths depreciated, was sold for $7,000.

b. The common stock of Byrd Corporation was purchased for $5,000 as a long-term investment.

c. Property was acquired by issuing a 13%, seven-year, $30,000 note payable to the seller.

d. New equipment was purchased for $15,000 cash.

e. On January 1, 2018, bonds were sold at their $25,000 face value.

f. On January 19, Dux issued a 5% stock dividend (1,000 shares). The market price of the $10 par value common stock was $14 per share at that time.

g. Cash dividends of $13,000 were paid to shareholders.

h. On November 12, 500 shares of common stock were repurchased as treasury stock at a cost of $8,000.

Required:

Prepare the statement of cash flows of Dux Company for the year ended December 31, 2018. Present cash flows from operating activities by the direct method. (You may omit the schedule to reconcile net income to cash flows from operating activities.)

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: The statement of cash flow of Company D 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 DUX Company: 

DUX 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	20	(17) 13		33
Accounts receivable	50		(1) 2	48
Less: Allowance	(3)		(1) 1	(4)
Dividends receivable	2	(2) 1		3
Inventory	50	(3) 5		55
Long term investment	10	(10) 5		15
Land	40	(11) 30 X		70
Buildings and equipment	250	(12) 15	(7) 40	225
Less: Acc. depreciation	(50)	(7) 30	(5) 5	(25)
Total assets	369			420
Liabilities and Stockholders’ Equity
Liabilities
Accounts payable	20	(3) 7		13
salaries payable	5	(4) 3		2
Interest payable	2		(6) 2	4
Income tax payable	8	(8) 1		7
Notes payable	0		X (11) 30	30
Bonds payable	70		(13) 25	95
Less: Discount on bonds	(3)		(6) 1	(2)
Stockholders’ equity
Common Stock	200		(14) 10	210
Paid in capital –ex of par	20		(14) 4	24
Retained Earnings	47	(14) 14
		(15) 13	(9) 25	45
Less: Treasury stock	0	(16) 8		(8)
Total liabilities and stockholders’ equity	369			420
Income Statement
Revenues
Sales revenue			(1) 200	200
Dividend revenue			(2) 3	3
Expenses
Cost of goods sold		(3) 120		(120)
Salaries expense		(4) 25		(25)
Depreciation expense		(5) 5		(5)
Bad debt expense		(1) 1		(1)
Interest expenses		(6) 8		(8)
Loss on sale of building		(7) 3		(3)
Income tax expense		(8) 16		(16)
Net income		(9) 25		25
Statement of Cash Flows
Operating activities:
Cash Inflows:
From customers		(1) 202
From dividends received		(2) 2
Cash Outflows:
To suppliers of goods			(3) 132
To employees			(4) 28
For  interest			(6) 5
For income taxes			(8) 17
Net cash flows				22
Investing activities:
Sale of building		(7) 7
Purchase of long term investment			(10) 5
Purchase of equipment			(12) 15
Net cash flows				(13)
Financing activities:
Sale of bonds payable		(13) 25
Payment of cash dividends			(15) 13
Purchase of treasury stock			(16) 8
Net cash flows				4
Net increase in cash			(17) 13	13
Total		584	584

Table (1)

Note (X):

Purchase $30,000 worth of land by issuing a 13%, 7-year note is considered as non cash investing and financing activities.

The spreadsheet of Company D shows the analysis of cash flows in the reporting year 2018:

DUX Company
Statement of Cash Flows (Direct Method)
Year Ended December 31, 2018
Details	Amount ($)	Amount ($)
Cash flows from operating activities:
Cash inflows:
From customers	202
From dividends received	2
Cash outflows:
To suppliers of goods	(132)
To employees	(28)
For interest	(5)
For income taxes	(17)
Net cash flows from operating activities		22
Cash flows from investing activities:
Sale of building	7
Purchase of long-term investment	(5)
Purchase of equipment	(15)
Net cash flows from investing activities		(13)
Cash flows from financing activities:
Sale of bonds payable	25
Purchase of treasury stock	(8)
Payment of cash dividends	(13)
Net cash flows from financing activities		4
Net increase in cash		13
Cash balance, January 1,		20
Cash balance, December 31,		33

Table (2)

Note (X):

Schedule of Non Cash Investing and Financing Activities:
Purchase of land issuing notes payable		$30

Table (3)

Conclusion

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