Chapter 12, Problem 9BP

a.

To determine

Calculate the change in cash during 2016.

Explanation of Solution

Calculate the change in cash during 2016:

$\begin{array}{c}\text{Change in cash }=\left(\begin{array}{l}\text{Cash balance in December 31, 2016}\\ -\text{Cash balance in December 31,2015}\end{array}\right)\\ =\$43,000-\$33,000\\ =\$10,000\end{array}$

Conclusion

Thus, the change in cash during 2016 is $10,000.

b.

To determine

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

Schedule in the Change of Current Assets and Liabilities
T 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	322,000
Cash received as dividend	18,000
Total cash receipts		340,000
Cash payments:
For wages and other operating expenses	(303000)
Total cash payments		303,000
Net cash provided operating activities		37,000
Cash flows from investing activities:
Cash sale of investment	87,000
Payment for franchise (See note 1)	(62,000)
Cash sale of equipment	9,000
Net cash provided by investing activities		34,000
Cash flows from financing activities:
Payment of notes payable	(26,000)
Purchase of treasury stock	(20,000)
Payment of dividend	(15,000)
Net cash used in financing activities		(61,000)
Net increase (decrease) in Cash		10,000
Cash balance, December 31, 2015		33,000
Cash balance, December 31, 2016		$43,000
Scheduled non-cash transaction:
Acquired plant by issuing 6,000 shares of common stock		60,000
Total non-cash transaction		$60,000

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.

$\begin{array}{c}\text{Cash}\text{receipts}\text{from}\text{Customers}=\left(\begin{array}{c}\text{Sales}\text{revenue}\\ +\text{Decrease in Accounts Receivable}\end{array}\right)\\ =\text{\$317,000}+\$5,000\\ =\$322,000\end{array}$

2.

Calculate the cash received from dividend and interest:

Cash receipts dividend and interest: It represents the total amount of cash received from dividend and interest.

$\left(\begin{array}{l}\text{Cash}\text{receipts}\text{from}\\ \text{Dividend and interest}\end{array}\right)=\left(\begin{array}{l}\text{Dividend and }\\ \text{interest income}\end{array}\right)\left(\begin{array}{l}+\text{Decrease in interest receivable}\\ \text{OR}\\ -\text{Increase in interest receivable}\end{array}\right)$

Calculate the amount of cash receipts from customers.

$\begin{array}{c}\text{Cash}\text{receipts}\text{from}\text{Customers}=\left(\begin{array}{c}\text{Dividend and interest revenue}\\ +\text{Decrease in interest Receivable}\end{array}\right)\\ =\text{\$14,000}+\$4,000\\ =\$18,000\end{array}$

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, and other operating expenses.

$\begin{array}{c}\left(\begin{array}{l}\text{Cash payments }\\ \text{for Wages and }\\ \text{other operating}\\ \text{expenses}\end{array}\right)=\left(\begin{array}{l}\text{Wages expense }\\ \text{and}\\ \text{operating }\\ \text{expenses}\end{array}\right)\left(\begin{array}{l}-\left(\begin{array}{l}\text{Decrease in }\\ \text{accrued liabilities}\end{array}\right)\text{/}\\ \text{Incresae in prepaid expenses}\\ \text{OR}\\ -\left(\begin{array}{l}\text{Increase in}\\ \text{ accrued liabilities}\end{array}\right)\text{/}\\ \text{Decrease in prepaid expenses}\end{array}\right)+\left(\begin{array}{l}\text{Fair value}\\ \text{Adjustment}\end{array}\right)\\ =\$285,000+\$6,000+\$2,000+10,000\\ =\$303,000\end{array}$

Note 1: Calculate cash payment for franchise.

$\begin{array}{c}\text{Cash payment for franchise}=\left(\begin{array}{l}\text{Ending balance }\\ \text{– Beginning balance}\end{array}\right)\\ =\$91,000-\$29,000\\ =\$62,000\end{array}$