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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 following statement of cash flows for Shasta Inc. was not correctly prepared:

Shasta Inc.

Statement of Cash Flows

For the Year Ended December 31, 20Y9

Cash flows from operating activities:
Net income............................................. $ 360,000  
Adjustments to reconcile net income to net cash flow from operating activities:
Depreciation......................................... 100,800  
Gain on sale of investments........................... 17,280  
Changes in current operating assets are liabilities:
Increase in accounts receivable...................... 27,360  
Increase in inventories.............................. (36,000)  
Increase in accounts payable........................ (3,600)  
Decrease in accrued expenses payable............... (12,400)  
Net cash flow from operating activities...................   $463,440
Cash flows from (used for) investing activities:
Cash from sale of investments............................ $ 240,000  
Cash used for purchase of land........................... (259,200)  
Cash used for purchase of equipment..................... (432,000)  
Net cash flow used for investing activities.................   (415,200)
Cash flows from (used for) financing activities:
Cash from sale of common stock......................... $ 312,000  
Cash used for dividends................................. (132,000)  
Net cash flow from financing activities....................   180,000
Increase (decrease) in cash..................................   $ 47,760
Cash at the end of the year..................................   192,240
Cash at the beginning of the year............................   $240,000

a. List the errors you find in the statement of cash flows. The cash balance at the beginning of the year was $240,000. All other amounts are correct, except the cash balance at the end of the year.

b. Prepare a corrected statement of cash flows.

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 List: The errors in the statement of cash flows.

Explanation

  • In cash flow from operating activities, the gain on sale of investments ($17,280) should be deducted from net income to determine the net cash flow from operating activities.
  • In cash flow from operating activities, the increase in accounts receivable ($27,360) should be deducted from net income to determine the net cash flow from operating activities...

b.

To determine

To Prepare: A corrected statement of cash flows.

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