Chapter 23, Problem 12SPB

EXPANDED STATEMENT OF CASH FLOWS Financial statements for McGinnis Company as well as additional information relevant to cash flows during the period are given below and on the next page.

Additional information:

1. Office equipment was sold in 20-2 for $35,000. Additional information on the office equipment sold is provided below.

2. Depreciation expense for the year was $70,000.

3. The following purchases were made for cash:

4. Declared and paid cash dividends of $40,000.

5. Issued 10,000 shares of $10 par common stock for $22 per share.

6. Acquired additional office equipment by issuing a note payable for $8,000.

REQUIRED

Prepare a statement of cash flows explaining the change in cash and cash equivalents for the year ended December 31, 20-2.

To determine

Prepare a statement of cash flows explaining the change in cash and cash equivalents for the year ended December 31, 20-2.

Explanation of Solution

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 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.

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 and current liabilities are adjusted to reconcile the net income balance.

Cash flows from operating activities: Operating activities refer to the normal activities of a company to carry out the business.

The below table shows the way of calculation of cash flows from operating activities:

Cash flows from operating activities (Indirect method)

Net income:

Add: Decrease in current assets

Increase in current liability

Depreciation expense and amortization expense

Loss on sale of plant assets

Deduct: Increase in current assets

Decrease in current liabilities

Gain on sale of plant assets

Net cash provided from or used by operating activities

Table (1)

Cash flows from investing activities: Investing activities refer to the activities carried out by a company for acquisition of long term assets.  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 collection of loan made to borrowers

Sale of marketable securities / investments

Sale of property, plant and equipment

Proceeds from discounting notes receivables

Deduct: Purchase of fixed assets/long-lived assets

Loan made by the company to others

Purchase of marketable securities

Net cash provided from or used by investing activities

Table (2)

Cash flows from financing activities: Financing activities refer to the activities carried out by a company to mobilize funds to carry out the business activities.  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 by signing of a mortgage

Proceeds from sale of treasury stock

Proceeds from issuance of debt

Deduct: Payment of dividend

Repayment of debt

Repayment of the principal on loan

Redemption of debt

Purchase of treasury stock

Net cash provided from or used by financing activities

Table (3)

Prepare a statement of cash flows explaining the change in cash and cash equivalents for the year ended December 31, 20-2.

Table (1)

Working notes:

Calculate the amount of cash and cash equivalents at January 1, 20-2:

$\begin{array}{c}\begin{array}{l}\text{Cash and cash equivalents }\\ \text{at January 1, 20-2}\end{array}\}=\left(\begin{array}{l}\text{Cash balance at January 1, 20-1}\\ \text{ + Government notes }\end{array}\right)\\ =\left(\$50,520+\$16,000\right)\\ =\$66,520\end{array}$

Compute the amount of cash paid for interest in 20-2:

Step 1: Calculate the change in accrued interest payable.

$\begin{array}{c}\begin{array}{l}\text{Change in accrued }\\ \text{interest payable}\end{array}\}=\left(\begin{array}{l}\text{Accrued interest payable in 20-2}-\\ \text{Accrued interest payable in 20-1}\end{array}\right)\\ =\left(\$900-\$1,200\right)\\ =\$300\left(\text{Decrease}\right)\end{array}$

Step 2: Calculate the amount of cash paid for interest in 20-2.

$\begin{array}{c}\left(\begin{array}{l}\text{Cash paid for }\\ \text{interest expenses}\end{array}\right)=\text{Interest expenses}\left(\begin{array}{l}\text{+Decrease in accrued liabilities}\\ \text{OR}\\ -\text{Increase in accrued liabilities}\end{array}\right)\\ =\left(\begin{array}{l}\text{Interest expenses +}\\ \text{Decrease in accrued interest payable}\end{array}\right)\\ =\$750+\$300\\ =\$1,050\end{array}$

Compute the amount of cash paid for income taxes in 20-2:

Step 1: Calculate the change in income taxes payable.

$\begin{array}{c}\begin{array}{l}\text{Change in income }\\ \text{taxes payable}\end{array}\}=\left(\begin{array}{l}\text{Income taxes payable in 20-2}-\\ \text{Income taxes payable in 20-1}\end{array}\right)\\ =\left(\$25,000-\$15,000\right)\\ =\$10,000\left(\text{Increase}\right)\end{array}$

Step 2: Calculate the amount of cash paid for income taxes in 20-2.

$\begin{array}{c}\left(\begin{array}{l}\text{Cash paid for }\\ \text{income taxes}\end{array}\right)=\text{Income tax expense}\left(\begin{array}{l}\text{+Decrease in income taxes payable}\\ \text{OR}\\ -\text{Increase in income taxes payable}\end{array}\right)\\ =\left(\begin{array}{l}\text{Income tax expense }-\\ \text{Increase in interest payable}\end{array}\right)\\ =\$95,000-\$10,000\\ =\$85,000\end{array}$