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.

Additional information:

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

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

3. The following purchases were made for cash:

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.

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.

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.

Table (1)

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
Details	Amount ($)	Amount ($)
Cash flows from operating activities:
Cash receipts:
Cash received from customers	1,905,100
Interest received	3,790
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
Details	Amount ($)			Adjustment in Operating Activities
Accounts	20-2	20-1	Increase/ (Decrease)
Accounts receivable	310,700	325,800	(15,100)	Add
Merchandised inventory	685,400	540,200	145,200	Less
Accounts payable	110,000	195,000	(85,000)	Less
Income tax payable	20,000	25,000	(5,000)	Less
Supplies and prepayments	27,000	39,000	(12,000)	Add
Accrued and withheld payroll taxes	16,400	14,900	1,500	Add
Accrued interest receivable	720	610	110	Less
Accrued interest payable	875	1,035	(160)	Less

Table (4)

Calculate the amount of cash received from customers.

$\begin{array}{c}\left(\begin{array}{l}\text{Cash}\text{receipts}\text{from}\\ \text{customers}\end{array}\right)=\left[\text{Net sales }\left(\begin{array}{l}+\text{Decrease in accounts receivable}\\ \text{OR}\\ -\text{Increase in accounts receivable}\end{array}\right)\right]\\ =\left(\text{Net sales + Decrease in accounts receivable}\right)\\ =\left(\$1,890,000+\$15,100\right)\\ =\$1,905,100\end{array}$

Calculate the amount of cash received for interest.

$\begin{array}{c}\begin{array}{l}\text{Cash}\text{received }\\ \text{for interest}\end{array}\}=\left[\text{Interst revenue }\left(\begin{array}{l}+\text{Decrease in accrued interest receivable}\\ \text{OR}\\ -\text{Increase in accrued interest receivable}\end{array}\right)\right]\\ =\left(\text{Interst revenue }-\text{Increase in accrued interest receivable}\right)\\ =\left(\$3,900-110\right)\\ =\$3,790\end{array}$

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

$\begin{array}{c}\begin{array}{l}\text{Cash}\text{paid for }\\ \text{merchandise}\end{array}\}=\text{Cost of Goods Sold }\left(\begin{array}{l}+\text{Decrease in Accounts Payable}\\ \text{/}\text{Increase in Inventory}\\ \text{OR}\\ -\text{Increase in Accounts Payable }\\ \text{/}\text{Decrease in Inventory}\end{array}\right)\\ =\left(\begin{array}{l}\text{Cost of goods sold + Decrease in accounts payable}\\ \text{ +Increase in inventory}\end{array}\right)\\ =\$940,000+\$85,000+\$145,200\\ =\$1,170,200\end{array}$

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

$\begin{array}{c}\begin{array}{l}\text{Cash paid for }\\ \text{operating expenses}\end{array}\}=\left[\begin{array}{l}\text{Operating expenses other than depreciation}\\ \left(\begin{array}{l}+\text{Decrease in accrued expense payable}\\ \text{+Increase in supplies and prepayments}\\ \text{OR}\\ -\text{Increase in accrued expense}\text{tax payable}\\ -\text{Decrease in supplies and prepayments}\end{array}\right)\end{array}\right]\\ =\left(\begin{array}{l}\text{Operating expenses }-\text{Depreciation expense}\\ -\text{ Increase in accrued and withheld payroll taxes}\\ -\text{Decrease in supplies and prepayments}\end{array}\right)\\ =\left(\text{\$572,300}-\text{\$112,000 }-\text{ \$1,500 }-\text{\$12,000}\right)\\ =\$446,800\end{array}$

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

$\begin{array}{c}\left(\begin{array}{l}\text{Cash paid for }\\ \text{interest expenses}\end{array}\right)=\text{Interest expenses}\left(\begin{array}{l}\text{+Decrease in accrued liabilities}\\ \text{OR}\\ -\text{Increase in accrued liabilities}\end{array}\right)\\ =\left(\begin{array}{l}\text{Interest expenses +}\\ \text{Decrease in accrued interest payable}\end{array}\right)\\ =\$890+\$160\\ =\$1,050\end{array}$

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

$\begin{array}{c}\left(\begin{array}{l}\text{Cash paid for }\\ \text{income taxes}\end{array}\right)=\text{Income tax expense}\left(\begin{array}{l}\text{+Decrease in income taxes payable}\\ \text{OR}\\ -\text{Increase in income taxes payable}\end{array}\right)\\ =\left(\begin{array}{l}\text{Income tax expense +}\\ \text{Decrease in interest payable}\end{array}\right)\\ =\$133,000+\$5,000\\ =\$138,000\end{array}$