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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Statement of cash flows—indirect method

The comparative balance sheet of Olson-Jones Industries Inc. for December 31, 20Y2 and 20Y1, is as follows:

  Dec. 31. 20Y2 Dec 31,20Y1
Assets    
Cash......................................................... $183 $ 14
Accounts receivable (net)...................................... 55 49
Inventories................................................... 117 99
  250 330
Equipment.................................................. 205 175
Accumulated depreciation—equipment..................... (68) (42)
Total assets................................................ $742 $625
Liabilities and Stockholders' Equity    
Accounts payable (merchandise creditors)...................... $ 51 $ 37
Dividends payable............................................. 5
Common stock. $1 par......................................... 125 80
Paid-in capital: Excess of issue price over par—common stock 85 70
Retained earnings............................................. 476 438
Total liabilities and stockholders' equity...................... $742 $625

The following additional information is taken from the records:

1. Land was sold for $120.

2. Equipment was acquired for cash.

3. There were no disposals of equipment during the year.

4. The common stock was issued for cash.

5. There was a $62 credit to Retained Earnings for net income.

6. There was a $24 debit to Retained Earnings for cash dividends declared.

a. Prepare a statement of cash flows, using the indirect method of presenting cash flows from operating activities.

b. Was Olson-Jones Industries Inc.’s net cash flow from operations more or less than net income? What is the source of this difference?

a.

To determine

Statement of cash flows: It is one of the financial statement that shows the cash and cash equivalents of a company for a particular period. It determines the net changes in cash through reporting the sources and uses of cash due to the operating, investing, and financing activities of a company.

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
         Depreciation expense and amortization expense
         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 under indirect method.

Explanation

Working note:

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 49 55 6 Deduct
Inventories 99 117 18 Deduct
Accounts payable 37 51 14 Add

Table (3)

Calculate the amount of depreciation expense:

Amount of depreciation expense =( Ending balance - Beginning balance)=($68$42)=$26

Calculate the amount gain on sale of land:

Amount gain on sale of land[Book value of land( Beginning balance - Ending balance  )Sale value]=($80($330$250)$120)=$40

Calculate the amount of cash used to purchase of equipment:

b.

To determine

To Explain: The cash flow from operations more or less than net income

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