Chapter 12, Problem 3GLP

To determine

Statement of cash flows:

The statement of cash flow is a financial statement, which provides a summary of actual or anticipated cash inflow and cash outflow in a firm over an accounting period. It determines the net changes in cash through reporting the sources and uses of cash due to operating, investing, and financial activities of a company.

Journal entry:

Journal is the primary record of the business transaction in chronological (date wise) order. Journal entry contains two effects, one is debit and other is credit, under the double entry book keeping system.

To prepare: Summary journal entries reflecting changes in consecutive trial balances.

Explanation of Solution

Prepare the journal entries as shown below.

Purchase of the equipment:

Date	Particulars	L/F	Amount ($)	Amount ($)
	Equipment		36,000
	Cash			36,000
	(To record the purchase of the equipment)

Table (1)

• Equipment account is an asset account. Here, assets have been purchased which increases the assets of the company. So, equipment account is debited.

• Cash is an asset account. Here, cash has been paid to acquire the equipment, which decreases the assets of the company. So, cash account is credited.

Issue of share:

Date	Particulars	L/F	Amount ($)	Amount ($)
	Cash		60,000
	Common stock			60,000
	(To record issue of the common stock)

Table (2)

• Cash is an asset account. Here, cash has been paid to acquire the equipment assets which decrease the assets of the company. So, cash account is credited.

• Common stock is a liability account. Here, common stock increases the debt of the company. So, the common stock account is credited.

Declared and payment of dividends:

Date	Particulars	L/F	Amount ($)	Amount ($)
	Dividends		89,000
	Cash			89,000
	(To record the payment of the dividend)

Table (3)

• A dividend is an expense account which increases the debt of the company. Hence, dividend account is debited.

• Cash is an asset account. Here, cash has been paid to acquire equipment, which decreases the assets of the company. So, cash account is credited.

Increase in accounts receivable:

Date	Particulars	L/F	Amount ($)	Amount ($)
	Accounts receivable		14,000
	Sales			14,000
	(To record the account receivable)

Table (4)

• Accounts receivable account is an asset account. Here, accounts receivable increases on the sale on credit. So, accounts receivable account is debited.

• Sales account is a revenue account. Here, sales generate revenue for the company. So, sales account is credited.

Purchase inventory by cash:

Date	Particulars	L/F	Amount ($)	Amount ($)
	Inventory account		440
	Cash			440
	(To record the purchase of the inventory)

Table (5)

• Inventory is an assets account. Here, the assets of the company are decreasing which decreases the assets of the company. So, the inventory account is debited.

• Cash is an asset account. Here, cash has been paid to acquire equipment, which decreases the assets of the company. So, cash account is credited.

Increase in accounts payable:

Date	Particulars	L/F	Amount ($)	Amount ($)
	Purchase		16,000
	Accounts payable			16,000
	(To record the account payable)

Table (6)

• Purchase is an expense account. Here, something is purchased due to which purchase expense is increased. So, the purchase account is debited.

• Accounts payable is a liability account. Here, accounts payable is increased. So, accounts payable account is credited.

Increase in the income tax payable:

Date	Particulars	L/F	Amount ($)	Amount ($)
	Retained earnings		3,000
	Income tax payable			3,000
	(To record the income tax payable)

Table (7)

• Retained earnings belong to shareholders which reduces the total shares. Hence, retained earnings account is debited.

• Income tax payable is a liability account. Here, the income tax payable is increasing, which increases the liabilities of the company. So, income tax payable account is credited.

Now, prepare the cash flow statement using the indirect method as shown below.

Particulars	Amount ($)
Cash flow from operating activities:
Net income	136,000
Adjustment for non cash expenses
Add: Depreciation expense	54,000
Adjustment for working capital changes:
Less: Increase in net working capital	(68,000)
Net cash flow from operating activities(A)	122,000
Cash paid from acquiring new equipment	(36,000)
Cash flow from investing activities(B)	(36,000)
Cash from issuance of shares	60,000
cash paid for dividends	(89,000)
Cash flow from financing activities(C)	(29,000)
Net increase in cash (A) + (B) + (C)	(57,000)
Cash and cash equivalent December 31, 2014	107,000
Cash and cash equivalent December 31, 2015	164,000

Table (8)

Working note:

1. Calculate the increase/decrease in the net working capital.

Particulars	2017 (X)	2016 (Y)	Increase/Decrease (X – Y)
Accounts receivable	83,000	71,000	12,000
Inventory	601,000	526,000	75,000
Increase/decrease in current assets (D)			87,000
Accounts payable	87,000	71,000	16,000
Income tax payable	28,000	25,000	3,000
Increase/decrease in current liabilities (E)
Increase/decrease in working capital (D) - (E)			68,000

Table (9)

Conclusion

Hence, the journal entries reflecting changes in consecutive trial balances are prepared as above.