Managerial Accounting: The Corners...

7th Edition

Maryanne M. Mowen + 2 others

ISBN: 9781337115773

Textbook Problem

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Balance sheets for Brierwold Corporation follow:

Additional transactions were as follows:

a. Purchased equipment costing $50,000.

b. Sold equipment costing $60,000, with a book value of $25,000, for $40,000.

c. Retired preferred stock at a cost of $110,000. (The premium is debited to Retained Earnings.)

d. Issued 10,000 shares of common stock (par value, $4) for $10 per share.

e. Reported a loss of $15,000 for the year.

f. Purchased land for $50,000.

Required:

Prepare a statement of cash flows using the worksheet approach. Use the indirect method to prepare the statement.

To determine

Construct a statement of cash flows with the help of a worksheet.

Explanation

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 B Corporation is shown in the table below:

Worksheet: B Corporation
For the year ending
Transactions
Particulars	Beginning Balance ($)		Debit ($)	Credit ($)	Ending Balance ($)
Assets:
Cash	100,000		(1) 50,000		150,000
Accounts receivable	200,000			(2) 20,000	180,000
Inventory	400,000		(3) 10,000		410,000
Plant and equipment	700,000		(4) 50,000	(5) 60,000	690,000
Accumulated depreciation	(200,000)		(5) 35,000	(6) 80,000	(245,000)
Land	100,000		(7) 50,000		150,000
Total assets	1,300,000				1,335,000

Liabilities and stockholder’s equity:
Accounts payable	300,000		(8) 50,000		250,000
Mortgage payable	-			(9) 110,000	110,000
Preferred stock	100,000		(10) 100,000	-	-
Common stock	240,000			(11) 40,000	280,000
Paid-in capital in excess of par	360,000			(11) 60,000	420,000
Retained earnings	300,000		(10) 10,000
			(12) 15,000		275,000
Total liabilities and stockholder’s equity	1,300,000				1,335,000

		Debit ($)		Credit ($)
Cash flows from operating activities:
Net loss				(12) 15,000
Decrease in accounts receivable		(2) 20,000
Increase in inventory		(5) 1,800		(3) 10,000
Decrease in accounts payable				(8) 50,000
Depreciation expense		(6) 80,000
Gain on sale of equipment				(5) 15,000
Cash flows from investing activities:
Sale of equipment		(5) 40,000
Purchase of equipment				(4) 50,000
Purchase of land				(7) 50,000
Cash flows from financing activities:
Retirement of preferred stock				(10) 110,000
Receipt of mortgage		(9) 110,000		(11) 36,000
Issuance of common stock		(11) 100,000
Net increase in cash				(1) 50,000

Table (1)

The analysis of transactions is as follows:

(1). Change in cash:

Date	Account Title and Explanation	Debit ($)	Credit ($)
	Cash	50,000
	Net increase in cash		50,000
	(Being the change in cash recorded)

Table (2)

Increase in accrual cash balance by $50,000 from the beginning to the end of the year is recorded.

(2). Change in accounts receivable:

Date	Account Title and Explanation	Debit ($)	Credit ($)
	Operating cash	20,000
	Accounts receivable		20,000
	(Being the decrease in accounts receivable recorded)

Table (3)

Decrease in accounts receivable by $20,000 is recognized on the income statement but is not collected. This cash inflow should be adjusted in the net income.

(3) Purchase of inventory:

Date	Account Title and Explanation	Debit ($)	Credit ($)
	Inventory	10,000
	Operating cash		10,000
	(Being the purchase value of inventory are recorded)

Table (4)

The purchase value of inventory is recorded by debiting the inventory account and crediting the operating cash account.

(4) Purchase value of plant and equipment:

Date	Account Title and Explanation	Debit ($)	Credit ($)
	Plant and equipment	50,000
	Operating cash		50,000
	(Being the purchase value of plant and equipment recorded)

Table (5)

The purchase value of the equipment which is $50,000 is debited and the operating cash account is credited.

(5). Gain on sale of equipment:

Date	Account Title and Explanation	Debit ($)	Credit ($)
	Cash from investing activities	40,000
	Accumulated depreciation	35,000
	Plant and equipment		60,000
	Gain on sale of equipment		15,000
	(Being the gain on sale of equipment recorded)

Table (6)

The cash from investing activities records the value at which the equipment is sold which is $40,000. The accumulated depreciation is debited to record the expense. The plant and equipment account is credited to record the original cost of the equipment. The gain value on the sale of equipment is credited.

(6). Accumulated depreciation expense:

Date	Account Title and Explanation	Debit ($)	Credit ($)
	Depreciation expense	80,000¹
	Accumulated depreciation		80,000
	(Being the accumulated depreciation recorded)

Table (7)

The accumulated depreciation of $80,000 is credited to record the depreciation expense.

(7). Value of land:

Date	Account Title and Explanation	Debit ($)	Credit ($)
	Land	50,000
	Operating cash		50,000
	(Being the fair value of land recorded)

Table (8)

The fair value of the land is recorded by debiting the land account and crediting the operating cash.

(8). Accounts payable:

Date	Account Title and Explanation	Debit ($)	Credit ($)
	Accounts payable	50,000
	Operating cash		50,000
	(Being the decrease in accounts payable recorded)

Table (9)

The decrease in accounts payable by $50,000 shows that all the purchases were not from cash...

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Accounting Managerial Accounting: The Cornerstone of Business Decision-Making 7th Edition