Chapter 4, Problem 4.11P

To determine

Statement of Cash Flow:

The statement of cash flows is one of the financial statements, which provides information about cash inflows and cash outflows of an enterprise’s operating, investing, and financing activities that occurred during the period.

To prepare: Statement of Cash Flow of S Industries for the period ended December 31, 2016.

Answer to Problem 4.11P

Prepare Statement of Cash Flows of S Industries for the period ended December 31, 2016.

S Industries
Statement of Cash Flows
For the period ending December 31, 2016
($ in thousands)
	Amount in $	Amount in $
Cash flows from operating activities:
Net income		3,850
Adjustments for non cash items:
Depreciation		1,600
Cash flows before changes in working capital		5,450
Changes in working capital:
Increase in accounts receivable (a)	(300)
Increase in inventory  (b)	(1,000)
Decrease in prepaid rent  (c)	150
Increase in accounts payable    (d)	300
Increase in interest payable  (e)	100
Increase in deferred service revenue   (f)	200
Decrease in income tax payable        (g)	(250)	(800)
Net Cash flows from operating activities (1)		4,650
Cash flows from investing activities:
Purchase of equipment	(4,000)
Sale of equipment	500
Net Cash flows from investing activities (2)		(3,500)
Cash flows from financing activities:
Loan payable	5,000
Payment of dividends	(1,000)
Net Cash flows from financing activities (3)		4,000
Net increase in cash and cash equivalents $\left(4\right)=\left(1\right)+\left(2\right)+\left(3\right)$		5,150
Cash and cash equivalents on January 1, 2016		2,200
Cash and cash equivalents on December 31, 2016		7,350

Table (1)

Explanation of Solution

• Increase in current assets and decrease in current liabilities causes cash outflows.
• Increase in current liabilities and decrease in current assets causes cash inflows.
• Payment of dividend is a financing activity and causes cash outflow.
• Purchase of equipment is an investing activity and causes cash outflow.
• Sale of equipment is an investing activity and causes cash inflow.
• Depreciation is a non cash expense, added back to net income.

Working notes:

1. (a) Compute changes in accounts receivables:

$\begin{array}{l}\text{Change in the accounts receivables = }\left(\begin{array}{l}\text{Balance on December31,}\text{2016 }-\text{ balance on }\\ \text{ December 31,2015}\end{array}\right)\\ \text{ = (\$2,500 }-\text{ \$2,200)}\\ \text{Increase}\text{in}\text{the}\text{accounts}\text{receivables}\text{ = }\left(\text{\$300}\right)\end{array}$

1. (b) Compute changes in inventory:

$\begin{array}{l}\text{Change in the inventory }=\left(\begin{array}{l}\text{ balance on December}\text{31,2016 }-\text{ balance on }\\ \text{ December 31,2015}\end{array}\right)\\ =(\$4,000-\$3,000)\\ \text{Increase}\text{in}\text{the}\text{inventory}=\$1,000\end{array}$

1. (c) Changes in the prepaid rent:

$\begin{array}{l}\text{Change in the prepaid rent }=\left(\begin{array}{l}\text{ balance on December}\text{31,2016 }-\text{ balance on }\\ \text{ December 31,2015}\end{array}\right)\\ =\left(\$150-\$300\right)\\ \text{Decrease}\text{in}\text{the}\text{prepaid}\text{rent}=\$150\end{array}$

1. (d) Changes in accounts payable:

$\begin{array}{l}\text{Change in the accounts payable }=\left(\begin{array}{l}\text{ balance on December}\text{31,2016 }-\text{ balance on }\\ \text{ December 31,2015}\end{array}\right)\\ =\left(\$1,400-\$1,100\right)\\ \text{Increase}\text{in}\text{the}\text{accounts}\text{payable}=\$300\end{array}$

1. (e) Changes in interest payable:

$\begin{array}{l}\text{Change in the interest payable }=\left(\begin{array}{l}\text{ balance on December}\text{31,2016 }-\text{ balance on }\\ \text{ December 31,2015}\end{array}\right)\\ =\left(\$100-\$0\right)\\ \text{Increase}\text{in}\text{the}\text{interest}\text{payable}=\$100\end{array}$

1. (f) Changes in deferred service revenue:

$\begin{array}{l}\text{Change in the deferred service revenue }=\left(\begin{array}{l}\text{ balance on December}\text{31,2016 }-\text{ balance on }\\ \text{ December 31,2015}\end{array}\right)\\ =\left(\$800-\$600\right)\\ \text{Increase}\text{in}\text{the}\text{deferred}\text{service}\text{revenue}=\$200\end{array}$

1. (g) Changes in income taxes payable:

$\begin{array}{l}\text{Change in the incomes taxes payable }=\left(\begin{array}{l}\text{ balance on December31,2016 }-\text{ balance on }\\ \text{ December 31,2015}\end{array}\right)\\ =\left(\$550-\$800\right)\\ \text{Decrease}\text{in}\text{the}\text{income tax payable}=\$250\end{array}$