Chapter 21, Problem 7P

1.

To determine

Prepare a spreadsheet to support the cash flow statement of B Company for the year 2016.

Explanation of Solution

Worksheet: A worksheet is a spreadsheet used while preparing a financial statement. It is a type of form having multiple columns and it is used in the adjustment process. The use of a worksheet is optional for any organization. A worksheet can neither be considered as a journal nor a part of the general ledger.

Statement of cash flows: Statement of cash flow reports all the cash transactions which are responsible for inflow and outflow of cash and result of these transactions is reported as ending balance of cash at the end of reported period. Statement of cash flows includes the changes in cash balance due to operating, investing, and financing activities.

Prepare a spreadsheet entry to support the cash flow statement.

Table (1)

Table (2)

Working notes:

a. Calculate the Changes in accounts receivable.

$\begin{array}{c}\text{Changes in accounts receivable=Closing balance}-\text{Opening balance}\\ \text{=\$4,720}-\$4,600\\ =\$120\end{array}$

b. Calculate the changes in inventory.

$\begin{array}{c}\text{Changes in inventory = Opening balance }-\text{Closing balance}\\ =\$12,000-\$9,700\\ =\$2,300\end{array}$

c. Calculate the change in prepaid item.

$\begin{array}{c}\text{Change in prepaid item=Opening balance}-\text{Closing balance}\\ \text{=\$1,700}-\$1,380\\ \text{Decrease in prepaid item=\$320}\end{array}$

d. Calculate the changes in accounts payable.

$\begin{array}{c}\text{Changes in accounts payable=Closing balance}-\text{Opening balance}\\ =\$8,210-\$6,000\\ =\$2,210\end{array}$

e. Calculate the changes in salaries payable.

$\begin{array}{c}\text{Changes in salaries payable=Closing balance }-\text{Opening balance}\\ \text{=\$3,500-\$2,600}\\ \text{=\$900}\end{array}$

f. Calculate the changes in miscellaneous current payable.

$\begin{array}{c}\begin{array}{l}\text{Changes in miscellaneous }\\ \text{current payable}\end{array})=\text{Opening balance}-\text{Closing balance}\\ \text{=\$1,400}-\$1,200\\ =\$200\end{array}$

g-1) Understated of depreciation  expenses for the last year by $1,800.

g-2) Received income tax refund  of $500.

h) Calculate the additional paid in capital received through treasury stock.

$\begin{array}{c}\begin{array}{l}\text{Additional paid in capital}\\ \text{through issue of treasury stock}\end{array})=\left(\begin{array}{l}\text{Proceeds from issue of treasury stock}-\\ \text{Value of common treasury stock}\end{array}\right)\\ \begin{array}{l}\text{Proceeds from issue }\\ \text{of treasury stock}\end{array})\text{=}\left(\text{Number of share}\times \text{Value of per share}\right)\\ =60\times \$30\\ =\$1,800\\ \text{Value of common treasury stock=}\left(\text{Number of share}\times \text{Cost per share}\right)\\ =60\times \$25\\ =\$1,500\\ \begin{array}{l}\text{Additional paid in capital}\\ \text{through issue of treasury stock}\end{array})=\$1,800-\$1,500\\ =\$300\end{array}$

i). Calculate the premium on bonds payable.

$\begin{array}{c}\text{Premium Bonds payable=}\left(\begin{array}{l}\text{Proceeds from issuance of bond}\\ -\text{Face value of bonds payable}\end{array}\right)\\ =\$7,750-\$7,000\\ =\$750\end{array}$

j-1) Common stock issued to convert the preferred stock by $3,000.

j-2) Preferred stock converted into common stock for $3,000.

k) Calculate the Premium on common stock.

$\begin{array}{c}\begin{array}{l}\text{Additional paid in }\\ \text{capital on common stock}\end{array})\text{ =}\left(\begin{array}{l}\text{Proceeds from issuance of common stock}\\ -\text{Face value of common stock}\end{array}\right)\\ \begin{array}{l}\text{Proceeds from issuance }\\ \text{of common stock}\end{array})\text{=}\left(\text{Number of share}\times \text{Value of per share}\right)\\ =300\times \$33\\ =\$9,900\\ \text{Face value of common stock=}\left(\text{Number of share}\times \text{Actual value of per share}\right)\\ =300\times \$10\\ =\$3,000\\ \begin{array}{l}\text{Additional paid in }\\ \text{capital on common stock}\end{array})\text{= \$9,900}-\$3,000\\ =\$6,000\end{array}$

l) Cash dividend paid by $4,000.

m) Amortization of premium on bonds payable by $100.

n) Cash increased by $200.

2.

To determine

Prepare a cash flow statement under indirect method of B Company for the year 2016 and show operating cash flow in the separate schedule.

Explanation of Solution

Operating activities: Operating activities include cash inflows and outflows from business operations.

Financing activities: Financing activities includes cash inflows and outflows from issuance of common stock and debt, payment of debt and dividends.

Investing activities: Investing activities includes cash inflows and cash outflows from purchase and sale of land or equipment, or investments.

Indirect method: Under indirect method, net income is reported first, and then non-cash expenses, losses from fixed assets, and changes in opening balances and ending balances of current assets are adjusted to reconcile the net income balance.

Prepare the cash flow statement under indirect method.

B company
Statement of cash flow
For the year end 2016
Particulars	Amount ($)	Amount ($)
Operating activities:
Net cash provided by operating activities ( schedule 1)		$22,950
Investing activities:
Proceeds from sale of land	$3,800
Payment for loan on note receivable	(1,000)
Payment for purchase of land	(9,000)
Payment for purchase of equipment	(32,000)
Net cash used for investing activities		($38,200)
Financing activities:
Proceeds from sale of treasury stock	$ 1,800
Proceeds from issuance of 12% bonds payable	7,750
Proceeds from issuance of common stock	9,900
Payment of dividends	(4,000)
Net cash provided by financing activities		15,450
Net increase in cash (Schedule 2)		$200
Cash, January 1, 2016		1,800
Cash, December 31, 2016		$2,000
Schedule 1: Cash flows from operating activities
Net income		$11,500
Adjustment for non-cash income items:
Add: Depreciation expense		6,000
Patent amortization expense		400
Less: Amortization of bond premium		(100)
Gain on sale of equipment		(900)
Adjustment for cash flow effects from working capital items:
Increase in accounts receivable		(120)
Decrease in inventories		2,300
Decrease in prepaid items		320
Increase in accounts payable		2,210
Increase in salaries payable		900
Increase in interest payable		140
Decrease in miscellaneous current payables		(200)
Income tax refund		500
Net cash provided by operating activities		$22,950
Schedule 2: Investing and Financing activities not affecting cash
Financing activities:
Conversion of preferred stock to common stock		($3,000)
Issuance of common stock to convert preferred stock		3,000

Table (3)

Therefore cash balance as on December 31, 2016 is $2,000.