Chapter 12, Problem 7AP

a.

To determine

Calculate the change in cash during 2016.

Explanation of Solution

$\begin{array}{c}\text{Change in cash }=\left(\begin{array}{l}\text{Cash balance in December 31, 2016}\\ -\text{Cash balance in December 31, 2015}\end{array}\right)\\ =\$71,000-\$28,000\\ =\$43,000\end{array}$

Conclusion

Thus, the change in cash during 2016 is $43,000.

b.

To determine

Prepare a statement of cash flow for A Corporation for the year ended December 31, 2016.

Explanation of Solution

Statement of cash flows: Statement of cash flows 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.

Cash flows from operating activities: Cash flows from operating activity represent the net cash flows from the general operation of the business by comparing the cash receipt and cash payments.

Direct method: The direct method uses the cash basis of accounting for the preparation of the statement of cash flows. It takes into account those revenues and expenses for which cash is either received or paid.

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

Less: Cash payments:

To supplier

Interest expense

For operating expenses

Income tax expenses

Net cash provided from or used by operating activities

Table (1)

Cash flows from investing activities: Cash provided by or used in investing activities is a section of statement of cash flows. It includes the purchase or sale of equipment or land, or marketable securities, which is used for business operations.

Cash flows from investing activities

Add: Proceeds from sale of fixed assets

Sale of marketable securities / investments

Dividend received

Deduct: Purchase of fixed assets/long-lived assets

Purchase of marketable securities

Net cash provided from or used by investing activities

Table (2)

Cash flows from financing activities: Cash provided by or used in financing activities is a section of statement of cash flows. It includes raising cash from long-term debt or payment of long-term debt, which is used for business operations.

Cash flows from financing activities

Add: Issuance of common stock

Proceeds from borrowings

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 (3)

A statement of cash flow for A Corporation for the year ended December 31, 2016.

Schedule in the Change of Current Assets and Liabilities
A Corporation
Statement of Cash Flows - Indirect Method
For the year ended December 31, 2016
Details	Amount ($)	Amount ($)
Cash flows from operating activities:
Cash receipts:
From customer	747,000
Total cash receipts		747,000
Cash payments:
To supplier	(542,000)
To employees	(190,000)
For interest	(12,000)
For advertising	(27,000)
Total cash payment		(771,000)
Net cash used in operating activities		(24,000)
Cash flows from investing activities:
Acquisition of plant asset	(183,000)
Cash received from disposition of plant asset	70,000
Net cash used for investing activities		(113,000)
Cash flows from financing activities:
Issuance of bonds payable	210,000
Purchase of treasury stock	(30,000)
Cash payment of dividends	0
Net cash provided by financing activities		180,000
Net increase (decrease) in Cash		43,000
Add: Cash balance, December 31, 2015		28,000
Cash balance, December 31, 2016		$71,000

Table (4)

Working notes:

Calculate the cash receipts and cash payments

1.

Calculate the amount of cash receipts from customers.

Cash receipts from customers: It represents the total amount of cash received from the sales as well as from the accounts receivables.

$\left(\begin{array}{l}\text{Cash}\text{receipts}\text{from}\\ \text{Customers}\end{array}\right)=\text{Sales}\text{revenue }\left(\begin{array}{l}+\text{Decrease in Accounts Receivable}\\ \text{OR}\\ -\text{Increase in Accounts Receivable}\end{array}\right)$

Calculate the amount of cash receipts from customers.

$\begin{array}{c}\text{Cash}\text{receipts}\text{from}\text{Customers}=\left(\begin{array}{c}\text{Sales}\text{revenue}\\ +\text{decrease in Accounts Receivable}\end{array}\right)\\ =\text{\$740,000}+\$7,000\\ =\$747,000\end{array}$

2.

Calculate the cash payments to suppliers.

Cash Payments to suppliers: It represents the total amount of cash paid for the purchase as well as to the accounts payable.

$\begin{array}{c}\text{Cash Payments to Suppliers}=\left(\begin{array}{c}\text{Cost of goods sold }\\ +\text{Decrease in} \text{Accounts Payable }\\ -\text{Decrease in Merchandised Inventory}\end{array}\right)\\ =\$534,000+\$14,000-\$6,000\\ =\$542,000\end{array}$

3.

Calculate the cash payments for Wages expenses.

It represents the total amount of cash paid for the wages.

$\left(\begin{array}{l}\text{Cash payments }\\ \text{for Wages}\end{array}\right)=\text{Wages expense}\left(\begin{array}{l}+\text{Decrease in wages payable}\\ \text{OR}\\ -\text{Increase in wages payable}\end{array}\right)$

Calculate the amount of cash payment made to employees.

$\begin{array}{c}\left(\begin{array}{l}\text{Cash payments }\\ \text{for Wages}\end{array}\right)=\text{Wages expense}\left(\begin{array}{l}\text{+Decrease in wages payable}\\ \text{OR}\\ -\text{Increase in wages payable}\end{array}\right)\\ =\$190,000+/-\$0\\ =\$190,000\end{array}$

4.

Calculate the cash payments for Interest expense.

It represents the total amount of cash paid for the interest expense.

$\left(\begin{array}{l}\text{Cash payments }\\ \text{for Interest}\end{array}\right)=\text{Interest expense}\left(\begin{array}{l}+\text{Decrease in interest payable}\\ \text{OR}\\ -\text{Increase in interest payable}\end{array}\right)$

Calculate the amount of cash payment made for interest.

$\begin{array}{c}\begin{array}{l}\text{Cash payments }\\ \text{for interest}\end{array}\}=\left(\begin{array}{c}\text{interest expense}\\ -\text{Increase in interest payable}\end{array}\right)\\ =\$18,000-\$6,000\\ =\$12,000\end{array}$

5.

Calculate the cash payments for advertising expense.

It represents the total amount of cash paid for the advertisement.

$\left(\begin{array}{l}\text{Cash payments }\\ \text{for Adverstsing}\end{array}\right)=\text{Advertising expense}\left(\begin{array}{l}+\text{Incresae in prepaid advertising}\\ \text{OR}\\ -\left(\begin{array}{l}\text{Decrease in prepaid}\\ \text{ prepaid advertising}\end{array}\right)\end{array}\right)$

Calculate the amount of cash payment made for income tax.

$\begin{array}{c}\begin{array}{l}\text{Cash payment}\\ \text{for advertising}\end{array}\}=\left(\begin{array}{c}\text{Advertising expense}\\ -\text{Decrease in prepaid advertising}\end{array}\right)\\ =\$31,000-\$4,000\\ =\$27,000\end{array}$

Working notes:

Note 1: Calculate the acquisition of plant asset.

Prepare plant asset account:

Plant asset comes under the assets section of the accounting equation;  therefore, a debit increases plant account balance and a credit decreases plant account balance.

Plant asset Account
Date	Details	Debit ($)		Date	Details	Credit ($)
	Beginning balance	222,000			disposed	45,000
	Acquisition	183,000
	Ending balance	360,000

Table (5)

$\begin{array}{c}\text{Acquisation }=\left(\$360,000-\$222,000\right)+\$45,000\\ =\$183,000\end{array}$

Note 2: Calculate the amount of cash dividend.

Prepare the statement of retained earnings to calculate the cash dividend:

Statement of retained earnings (RE):

• It is a financial statement which is prepared to find out the amount of earnings retained in the business.
• Retained earnings are the amount of profit left for the stockholders after all the expenses and taxes.
• It is calculated by deducting the amount of dividends and taxes from the net income.

Statement of retained earnings For the year ended December 31, 2015
Details	Amount ($)	Amount ($)
Beginning balance		94,000
Less: Net loss		(32,000)
Retained earnings before dividend		62,000
Less: cash dividend		0
Ending balance of retained earnings		$62,000

Table (6)