Chapter 12, Problem 9AP

a.

To determine

Calculate the change in cash during 2016:

Explanation of Solution

$\begin{array}{c}\text{Change in cash }=\left(\begin{array}{l}\text{Cash balance in December 31, 2016}\\ -\text{Cash balance in December 31,2015}\end{array}\right)\\ =\left(\$25,000-\$29,000\right)\\ =\$\left(4,000\right)\end{array}$

Conclusion

Thus, the change in cash during 2016 is $(4,000).

b.

To determine

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

Schedule in the Change of Current Assets and Liabilities
R 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	735,000
Cash received as dividend	19,000
Total cash receipts		754,000
Cash payments:
To supplier	(462,000)
For wages and other operating expenses	(134,000)
For interest	(12,000)
For income tax	(48,000)
Total cash payments		656,000
Net cash provided operating activities		98,000
Cash flows from investing activities:
Cash sale of investment	60,000
Cash purchase of land (Refer note 1)	(90,000)
Capital expenditure for building (Refer note 2)	(95,000)
Cash sale of equipment	14,000
Net cash used in investing activities		(111,000)
Cash flows from financing activities:
Issuance of bonds payable for cash (Refer note 3)	40,000
Issuance of common stock  (Refer note 4)	24,000
Cash payment of dividends	(55,000)
Net cash provided financing activities		9,000
Net increase (decrease) in Cash		(6,000)
Cash balance, December 31, 2015		25,000
Cash balance, December 31, 2016		19,000
Scheduled non-cash transaction:
Acquired plant by issuing 250 preferred stock		25,000
Total non-cash transaction		$25,000

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.

$\begin{array}{c}\text{Cash}\text{receipts}\text{from}\text{Customers}=\left(\begin{array}{c}\text{Sales}\text{revenue}\\ -\text{Increase in Accounts Receivable}\end{array}\right)\\ =\text{\$750,000}-\$15,000\\ =\$735,000\end{array}$

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.

$\left(\begin{array}{l}\text{Cash}\text{payment }\\ \text{to suppliers}\end{array}\right)=\text{Cost of Goods Sold }\left(\begin{array}{l}+\text{ Decrease in Accounts Payable}\\ \text{/}\text{Increase in Inventory}\\ \text{OR}\\ -\text{Increase in Accounts Payable }\\ \text{/}\text{Decrease in Inventory}\end{array}\right)$

$\begin{array}{c}\text{Cash Payments to Suppliers}=\left(\begin{array}{c}\text{Cost of goods sold }\\ -\text{Increase in} \text{Accounts Payable }\\ +\text{Increase in Merchandised Inventory}\end{array}\right)\\ =\$440,000-\$4,000+\$26,000\\ =\$462,000\end{array}$

3.

Calculate the cash payments for Wages and other operating expenses.

It represents the total amount of cash paid for the wages and for other operating expenses.

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

Calculate the amount of cash payment made to employees.

$\begin{array}{c}\left(\begin{array}{l}\text{Cash payments }\\ \text{for Wages and }\\ \text{other operating}\\ \text{expenses}\end{array}\right)=\left\{\begin{array}{l}\left(\begin{array}{l}\text{Wages expense }\\ \text{and}\\ \text{operating }\\ \text{expenses}\end{array}\right)\left(\begin{array}{l}\text{+Decrease in wages payable/}\\ \text{Incresae in prepaid expenses}\\ \text{OR}\\ -\text{Increase in wages payable/}\\ \text{Decrease in prepaid expenses}\end{array}\right)\\ -\left(\begin{array}{l}\text{gain }\\ \text{on sale}\\ \text{of}\\ \text{Investment}\end{array}\right)\end{array}\right\}\\ =\$130,000+\$4,000+\$10,000-\$5,000\\ =\$134,000\end{array}$

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 income tax.

$\begin{array}{c}\begin{array}{l}\text{Cash payments }\\ \text{for interest}\end{array}\}=\left(\begin{array}{c}\text{Intererest expense}\\ -\text{Increase in interest payable}\end{array}\right)\\ =\$13,000-\$1,000\\ =\$12,000\end{array}$

5.

Calculate the cash payments for income taxes.

It represents the total amount of cash paid for the income tax.

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

Calculate the amount of cash payment made for income tax.

$\begin{array}{c}\begin{array}{l}\text{Cash payments }\\ \text{for income taxes}\end{array}\}=\left(\begin{array}{c}\text{Income tax expense}\\ +\text{Decrease in income tax payable}\end{array}\right)\\ =\$44,000+\$4,000\\ =\$48,000\end{array}$

Note 1: Calculate cash purchase of land.

$\begin{array}{c}\text{Purchase of land}=\left(\begin{array}{l}\text{Ending balance}\\ -\text{Beginning balance}\end{array}\right)\\ =\$190,000-\$100,000\\ =\$90,000\end{array}$

Note 2: Calculate capital expenditure for building.

$\begin{array}{c}\text{Capital expenditure for building}=\left(\begin{array}{l}\text{Ending balance}\\ -\text{Beginning balance}\end{array}\right)\\ =\$445,000-\$350,000\\ =\$95,000\end{array}$

Note 3: Calculate issuance of bonds payable.

$\begin{array}{c}\text{Issuance of bonds payable}=\left(\begin{array}{l}\text{Ending balance}\\ -\text{Beginning balance}\end{array}\right)\\ =\$165,000-\$125,000\\ =\$40,000\end{array}$

Note 4: Calculate value of stock issued at cash.

$\begin{array}{c}\text{Cash received from issuance of stock }=\left(\begin{array}{l}\text{Number of issuing shares}\\ \times \text{Cash per share}\end{array}\right)\\ =3,000\text{ shares }\times \$8\\ =\$24,000\end{array}$