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Managerial Accounting: The Corners...
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Managerial Accounting: The Corners...
The following balance sheets and income statement were taken from the records of Rosie-Lee Company:
Additional transactions were as follows:
- a. Sold equipment costing $21,600, with accumulated depreciation of $16,200, for $3,600.
- b. Issued bonds for $90,000 on December 31.
- c. Paid cash dividends of $36,000.
- d. Retired mortgage of $108,000 on December 31.
Required:
Prepare a statement of cash flows using a worksheet similar to the one shown in Example 14.8 (p. 804). Use the indirect method to prepare the statement.
Construct a statement of cash flows with the help of a worksheet.
Worksheet:
The chart prepared in a spreadsheet format as a helping tool in accounting is known as worksheet. With the help of worksheet, a cash flow statement can be prepared with less confusion and complexity.
The worksheet for the PM Company is shown in the table below:
| Worksheet: R-L Company | ||||||||
| For the year ended June 30, 20X2 | ||||||||
| Transactions | ||||||||
| Particulars | Beginning Balance ($) | Debit ($) | Credit ($) | Ending Balance ($) | ||||
| Assets: | ||||||||
| Cash | 270,000 | (1) 63,000 | Â | 333,000 | ||||
| Accounts receivable | 126,000 | (2) 18,000 | Â | 144,000 | ||||
| Investments | - | (3) 54,000 | Â | 54,000 | ||||
| Plant and equipment | 180,000 | (4) 30,600 | (5) 21,600 | 189,000 | ||||
| Accumulated depreciation | (54,000) | (5) 16,200 | (6) 19,800 | (57,600) | ||||
| Land | 36,000 | (7) 18,000 | Â | 54,000 | ||||
| Â Â Â Total assets | 558,000 | Â | Â | 716,400 | ||||
| Â | ||||||||
| Liabilities and stockholder’s equity: | ||||||||
| Accounts payable | 72,000 | Â | (8) 18,000 | 90,000 | ||||
| Mortgage payable | 108,000 | (9) 108,000 | Â | - | ||||
| Bonds payable | - | Â | (10) 90,000 | 90,000 | ||||
| Preferred stock | 36,000 | (11) 36,000 | - | - | ||||
| Common stock | 180,000 | Â | (12) 108,000 | 288,000 | ||||
| Retained earnings | 162,000 | (13) 36,000 | (14) 122,400 | 248,400 | ||||
|    Total liabilities and stockholder’s equity | 252,000 |  |  | 716,400 | ||||
| Â | Â | |||||||
| Â | Debit ($) | Credit ($) | ||||||
| Cash flows from operating activities: | Â | Â | ||||||
| Net income (loss) | (14) 122,400 | Â | ||||||
| Â Â Â Increase in accounts receivable | - | (2) 18,000 | ||||||
| Â Â Â Increase in accounts payable | (8) 18,000 | Â | ||||||
| Â Â Â Depreciation expense | (6) 19,800 | Â | ||||||
| Â Â Â Loss on sale of equipment | (5) 1,800 | Â | ||||||
| Cash flows from investing activities: | Â | Â | ||||||
| Â Â Â Sale of equipment | (5) 3,600 | Â | ||||||
| Â Â Â Purchase of equipment | Â | (4) 30,600 | ||||||
| Â Â Â Purchase of land | Â | (7) 18,000 | ||||||
| Â Â Â Purchase of investments | Â | (3) 54,000 | ||||||
| Cash flows from financing activities: | Â | Â | ||||||
| Â Â Â Retirement of mortgage | Â | (9) 108,000 | ||||||
| Â Â Â Retirement of preferred stock | Â | (11) 36,000 | ||||||
| Â Â Â Issuance of bonds | (10) 90,000 | Â | ||||||
| Â Â Â Issuance of common stock | (12) 108,000 | Â | ||||||
| Â Â Â Payment of dividends | (10) 8,000 | (13) 36,000 | ||||||
| Net increase in cash | Â | (1) 63,000 | ||||||
Table (1)
The analysis of transactions is as follows:
(1). Change in cash:
| Date | Account Title and Explanation |
Debit ($) |
Credit ($) |
| Â | Cash | 63,000 | Â |
| Â | Â Â Â Â Net increase in cash | Â | 63,000 |
| Â | (Being the change in cash recorded) | Â | Â |
Table (2)
Increase in accrual cash balance by $63,000 from the beginning to the end of the year is recorded.
(2). Change in accounts receivable:
| Date | Account Title and Explanation |
Debit ($) |
Credit ($) |
| Â | Accounts receivable | 18,000 | Â |
| Â | Â Â Â Â Operating cash | Â | 18,000 |
| Â | (Being the increase in accounts receivable recorded) | Â | Â |
Table (3)
Increase in accounts receivable by $18,000 is recognized on the income statement but is not collected. This cash inflow should be adjusted in the net income.
(3) Purchase of investments:
| Date | Account Title and Explanation |
Debit ($) |
Credit ($) |
| Â | Investments | 54,000 | Â |
| Â | Â Â Â Â Operating cash | Â | 54,000 |
| Â | (Being the purchase value of investments are recorded) | Â | Â |
Table (4)
The purchase value of investments is recorded by debiting the investment account and crediting the operating cash account.
(4) Purchase value of plant and equipment:
| Date | Account Title and Explanation |
Debit ($) |
Credit ($) |
| Â | Plant and equipment | 30,6001 | Â |
| Â | Â Â Â Â Operating cash | Â | 32,000 |
| Â | (Being the purchase value of plant and equipment recorded) | Â | Â |
Table (5)
The purchase value of the equipment which is $30,600 is debited and the operating cash account is credited.
(5). Sale value of equipment:
| Date | Account Title and Explanation |
Debit ($) |
Credit ($) |
| Â | Operating cash | 1,800 | Â |
| Â | Cash from investing activities | 3,600 | Â |
| Â | Accumulated depreciation | 16,200 | Â |
| Â | Â Â Â Â Plant and equipment | Â | 21,600 |
| Â | (Being the loss on sale of equipment recorded) | Â | Â |
Table (6)
The operating cash flows are increased by $1,800; so, the loss on sale should be added back to the net income for the adjustment. The cash from investing activities records the value at which the equipment is sold which is $3,600. The accumulated depreciation is debited to record the expense. The plant and equipment account is credited to record the original cost of the equipment.
(6). Accumulated depreciation expense:
| Date | Account Title and Explanation |
Debit ($) |
Credit ($) |
| Â | Operating cash | 19,8002 | Â |
| Â | Â Â Â Â Accumulated depreciation | Â | 19,800 |
| Â | (Being the accumulated depreciation recorded) | Â | Â |
Table (7)
There is net decrease in accumulated depreciation of $19,800.
(7). Value of land:
| Date | Account Title and Explanation |
Debit ($) |
Credit ($) |
| Â | Land | 18,000 | Â |
| Â | Â Â Â Â Operating cash | Â | 18,000 |
| Â | (Being the fair value of land recorded) | Â | Â |
Table (8)
The fair value of the land is recorded by debiting the land account and crediting the operating cash...
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