Statement of
Indirect method: Under this method, the following amounts are to be adjusted from the Net Income to calculate the net cash provided from operating activities.
Cash flows from operating activities: These are the cash produced by the normal business operations.
The below table shows the way of calculation of cash flows from operating activities:
Cash flows from operating activities (Indirect method) |
Add: Decrease in current assets |
Increase in current liability |
|
Loss on sale of plant assets |
Deduct: Increase in current assets |
Decrease in current liabilities |
Gain on sale of plant assets |
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.
The below table shows the way of calculation of cash flows from investing activities:
Cash flows from investing activities |
Add: Proceeds from sale of fixed assets |
Sale of marketable securities / investments |
Interest received |
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.
The below table shows the way of calculation of cash flows from financing activities:
Cash flows from financing activities |
Add: Issuance of common stock |
Proceeds from borrowings |
Proceeds from issuance of debt |
Issuance of bonds payable |
Deduct: Payment of dividend |
Repayment of debt |
Interest paid |
Redemption of debt |
Repurchase of stock |
Net cash provided from or used by financing activities |
Table (3)
To Prepare: A statement of cash flows using the indirect method for presenting cash flows from operating activities.
Explanation of Solution
Explanation
Company W | ||
Statement of Cash Flows | ||
For the year ended December 31, 2016 | ||
Details | Amount ($) | Amount ($) |
Cash flows from operating activities: | ||
Net loss | (35,320) | |
Adjustments to reconcile net income to net cash flow from operating activities: | ||
Depreciation expense | 55,620 | |
Loss on sales of land | 12,600 | |
Changes in current operating assets and liabilities: | ||
Increase in accounts receivable | (66,960) | |
Increase in merchandised inventory | (105,480) | |
Decrease in prepaid expenses | 5,760 | |
Decrease in accounts payable | (35,820) | |
Net cash used for operating activities | ($169,600) | |
Cash flows from investing activities: | ||
Cash from land sold | 151,200 | |
Cash used for acquisition of building | (561,600) | |
Cash used for purchase of equipment | (104,400) | |
Net cash used for investing activities | ($514,800) | |
Cash flows from financing activities: | ||
Cash received from sale of common stock | 400,000 | |
Cash received from issuance of bonds payable | 270,000 | |
Cash used for dividends | (32,400) | |
Net cash provided by financing activities | $637,600 | |
Increase (decrease) in cash | ($46,800) | |
Cash at the beginning of the year | 964,800 | |
Cash at the end of the year | $918,000 |
Table (4)
Working notes:
Prepare the schedule in the changes of current assets and liabilities.
Schedule in the Change of Current Assets and Liabilities | ||||
Details | Amount ($) | Effect on Operating Activities | ||
Beginning Balance | Ending Balance | Increase/ (Decrease) |
||
Accounts receivable | 761,940 | 828,900 | 66,960 | Deduct |
Merchandised inventories | 1,162,980 | 1,268,460 | 105,480 | Deduct |
Prepaid expenses | 35,100 | 29,340 | (5,760) | Add |
Accounts payable | 958,320 | 922,500 | (35,820) | Deduct |
Table (5)
Calculate the amount of cash received from common stock:
Therefore, the ending cash balance is $918,000
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Chapter 14 Solutions
Financial & Managerial Accounting
- Statement of cash flowsdirect method applied to PR 14-1A The comparative balance sheet of Cromme Inc. for December 31, 2016 and 2015, is as follows: Dec. 31,2016 Dec. 31,2015 Assets Cash 625,760 585,920 Accounts receivable (net) 227,840 208,960 Inventories 641.760 617,120 Investments 0 240,000 Land 328,000 0 Equipment 705,120 553,120 Accumulated depreciationequipment (166,400) (148,000) Total assets 2,362,080 2,057,120 Liabilities and Stockholders Equity Accounts payable (merchandise creditors) 424,4B0 404.960 Accrued expenses payable (operating expenses) 42,240 52,640 Dividends payable 24,000 19,200 Common stock, 2 par 150,000 100,000 Paid in capital: Excess of issue price over parcommon stock 417,500 280,000 Retained earnings 1,303,860 1,200,320 Total liabilities and stockholders equity 2,362,080 2,057,120 The income statement for the year ended December 31, 2016, is as follows: Sales 5,372,559 Cost of merchandise sold 3,306,190 Gross profit 52,066,369 Operating expenses: Depreciation expense 18,400 Other operating expenses 1,755,402 Total operating expenses 1,773,802 Operating income 292,567 Other income: Gain on sale of investments 40,000 Income before income tax 332,567 Income tax expense 133,027 Net income 199,540 Additional data obtained from an examination of the accounts in the ledger for 2016 are as follows: a. The investments were sold for 280,000 cash. b. Equipment and land were acquired for cash. c. There were no disposals of equipment during the year. d. The common stock was issued for cash. e. There was a 96,000 debit to Retained Earnings for cash dividends declared. Instructions Prepare a statement of cash flows, using the direct method of presenting cash flows from operating activities.arrow_forwardStatement of cash flowsindirect method The comparative balance sheet of Del Ray Enterprises Inc. at December 31, 2016 and 2015 is as follows: Dec 31,2016 Dec. 31,2015 Assets Cash 146.600 S 179,800 Accounts receivable (net).. 224,600 242,000 Merchandise inventory.. 321,600 299,200 Prepaid expenses.. 13,400 9,600 Equipment.. 655,000 537,000 Accumulated depreciationequipment.. (170,800) (132,200) Total assets.. 1,190,400 1,135,400 Liabilities and Stockholders Equity Accounts payable (merchandise creditors) .. 250,200 S 237,600 Mortgage note payable.. 0 336,000 Common stock, 10 par.. 74,000 24,000 Paid in capital: Excess of issue price over parcommon stock.. 470,000 320,000 Retained earnings.. 396,200 217,800 Total liabilities and stockholders equity.. 1,190,400 1,135,400 Additional data obtained from the income statement and from an examination of the accounts in the ledger for 2016 are as follows: a. Net income, 332,000 b. Depreciation reported on the income statement, 83,400 c. Equipment was purchased at a cost of 162,800 and fully depreciated equipment costing 44,800 was discarded, with no salvage realized. d. The mortgage note payable was not due until 2018 but the terms permitted earlier payment without penalty. e. 10,000 shares of common stock were issued at 20 for cash. f. Cash dividends declared and paid. 153,600 Instructions Prepare a statement of cash flows, using the indirect method of presenting cash flows from operating activities.arrow_forward
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