College Accounting, Chapters 1-27
College Accounting, Chapters 1-27
23rd Edition
ISBN: 9781337794756
Author: HEINTZ, James A.
Publisher: Cengage Learning,
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Chapter 23A, Problem 7SPA

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

Chapter 23A, Problem 7SPA, EXPANDED STATEMENT OF CASH FLOWS Financial statements for McDowell Company as well as additional , example  1

Chapter 23A, Problem 7SPA, EXPANDED STATEMENT OF CASH FLOWS Financial statements for McDowell Company as well as additional , example  2

Additional information:

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

Chapter 23A, Problem 7SPA, EXPANDED STATEMENT OF CASH FLOWS Financial statements for McDowell Company as well as additional , example  3

2. Depreciation expense for the year was $112,000.

3. The following purchases were made for cash:

Chapter 23A, Problem 7SPA, EXPANDED STATEMENT OF CASH FLOWS Financial statements for McDowell Company as well as additional , example  4

4. Declared and paid cash dividends of $60,000.

5. Issued 10,000 shares of $10 par common stock for $142 per share.

6. Acquired additional office equipment by issuing a note payable for $ 16,000.

Chapter 23A, Problem 7SPA, EXPANDED STATEMENT OF CASH FLOWS Financial statements for McDowell Company as well as additional , example  5

REQUIRED

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

SCHEDULE FOR CALCULATION OF CASH GENERATED FROM OPERATING ACTIVITIES Using the information provided in Problem 23-12A for McDowell Company, prepare the following:

1. A schedule for the calculation of cash generated from operating activities for McDowellCompany for the year ended December 31, 20-2.

2. A partial statement of cash flows for McDowell Company reporting cash from operating activities under the direct method for the year ended December 31, 20-2.

1.

Expert Solution
Check Mark
To determine

Prepare a schedule for the calculation of cash generated from operating activities for M Company for the year ended December 31, 20-2.

Explanation of Solution

Direct method: Under direct method, cash receipts from customers (cash inflows) and cash payments to suppliers (cash outflows) are reported under the operating activities.

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

Prepare a schedule for the calculation of cash generated from operating activities for M Company for the year ended December 31, 20-2.

College Accounting, Chapters 1-27, Chapter 23A, Problem 7SPA

Table (1)

2.

Expert Solution
Check Mark
To determine

Prepare a statement of cash flows for M Company under the direct method 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.

Direct method: Under direct method, cash receipts from customers (cash inflows) and cash payments to suppliers (cash outflows) are reported under the operating activities.

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

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

Cash flows from operating activities (Direct method)
 
Add: Cash receipts.
         Cash receipt from customer
         Dividend received
         Interest received
 
Less: Cash payments:
To supplier for acquisition of inventory
To employees
For interest on loans
Income tax expenses and other operating expenses
Net cash provided from or used by operating activities

Table (2)

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 (3)

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
              Interest paid
              Redemption of debt
              Purchase of treasury stock
Net cash provided from or used by financing activities

Table (4)

Prepare a statement of cash flows for M Company under the direct method for the year ended December 31, 20-2.

M Company
Statement of Cash Flows Direct Method (Partial)
For the Year Ended December 20-2
 
DetailsAmount ($)Amount ($)
Cash flows from operating activities:  
Cash receipts:  
Cash received from customers1,905,100 
Interest received3,790 
Total cash receipts 1,908,890
Cash payments:  
Cash paid for merchandise(1,170,200) 
Cash paid for operating expenses(446,800) 
Cash paid for interest(1,050) 
Cash paid for income taxes(138,000) 
Total cash payments(1,756,050)
Net cash provided by operating activities $152,840
  
Cash flows from investing activities:  
Sold store equipment$25,000  
Purchased store equipment(64,000) 
Purchased delivery equipment(140,000) 
Purchased office equipment(30,000) 
Net cash used by investing activities (209,000)
   
Cash flows from financing activities:  
Issued common stock$140,000  
Paid cash dividends(60,000) 
Net cash provided by financing activities 80,000
Net increase (decrease) in cash and cash equivalents $23,840
Cash and cash equivalents, January 1, 20-2 58,325
Cash and cash equivalents, December 31, 20-2 $82,165
   
Schedule of Noncash Investing and Financing Activities:  
Acquired store equipment by issuing a note payable $16,000

Table (5)

Working notes:

Prepare the schedule in the changes of current assets and liabilities.

Schedule in the Change of Assets and Liabilities
DetailsAmount ($)Adjustment in Operating Activities
Accounts20-220-1Increase/ (Decrease)
Accounts receivable310,700325,800(15,100)Add
Merchandised inventory685,400540,200145,200Less
Accounts payable110,000195,000(85,000)Less
Income tax payable20,00025,000(5,000)Less
Supplies and prepayments27,00039,000(12,000)Add
Accrued and withheld payroll taxes16,40014,9001,500Add
Accrued interest receivable720610110Less
Accrued interest payable8751,035(160)Less

Table (4)

Calculate the amount of cash received from customers.

(Cashreceiptsfromcustomers)=[Net sales (+Decrease in accounts receivableORIncrease in accounts receivable)]=(Net sales + Decrease in accounts receivable)=($1,890,000+$15,100)=$1,905,100

Calculate the amount of cash received for interest.

Cashreceived for interest}=[Interst revenue (+Decrease in accrued interest receivableORIncrease in accrued interest receivable)]=(Interst revenue Increase in accrued interest receivable)=($3,900110)=$3,790

Calculate the amount of cash paid for merchandise in 20-2.

Cashpaid for merchandise}=Cost of Goods Sold (+Decrease in Accounts Payable/Increase in InventoryORIncrease in Accounts Payable /Decrease in Inventory)=(Cost of goods sold + Decrease in accounts payable +Increase in inventory)=$940,000+$85,000+$145,200=$1,170,200

Compute the amount of cash received from customers in 20-2.

Cash paid for operating expenses}=[Operating expenses other than depreciation (+Decrease in accrued expense payable+Increase in supplies and prepaymentsORIncrease in accrued expensetax payableDecrease in supplies and prepayments)]=(Operating expenses Depreciation expense Increase in accrued and withheld payroll taxesDecrease in supplies and prepayments)=($572,300$112,000  $1,500 $12,000)=$446,800

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

(Cash paid for interest expenses)=Interest expenses(+Decrease in accrued liabilitiesORIncrease in accrued liabilities)=(Interest expenses +Decrease in accrued interest payable)=$890+$160=$1,050

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

(Cash paid for income taxes)=Income tax expense(+Decrease in income taxes payableORIncrease in income taxes payable)=(Income tax expense +Decrease in  interest payable)=$133,000+$5,000=$138,000

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