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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 Navaria Inc. for December 31, 20Y3 and 20Y2, is shown as follows:

  Dec 31, 20Y3 Dec. 31, 20Y2
Assets    
  $ 155,000 $ 150,000
Accounts receivable (net) 450,000 400,000
Inventories 770,000 750,000
Investments 0 100,000
Land 500,000 0
Equipment 1,400,000 1,200,000
Accumulated depreciation—equipment (600,000) (500,000)
Total assets $2,675,000 $2,100,000
Liabilities and Stockholders' Equity    
Accounts payable $ 340,000 $ 300,000
Accrued expenses payable 45,000 50,000
Dividends payable 30,000 25,000
Common stock. $4 par 700,000 600,000
Paid-in capital: Excess of issue price over par—common stock 200,000 175,000
Retained earnings 1,360.000 950,000
Total liabilities and stockholders' equity $2,675,000 $2,100,000

Additional data obtained from an examination of the accounts in the ledger for 20Y3 are as follows:

  1. a. The investments were sold for $175,000 cash.
  2. b. Equipment and land were acquired for cash.
  3. c. There were no disposals of equipment during the year.
  4. d. The common stock was issued for cash
  5. e. There was a $500,000 credit to Retained Earnings for net income.
  6. f. There was a $90,000 debit to Retained Earnings for cash dividends declared.

Instructions

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

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 using the indirect method  for presenting cash flows from operating activities.

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 400,000 450,000 50,000 Deduct
Inventories 750,000 770,000 20,000 Deduct
Accounts payable 300,000 340,000 40,000 Add
Accrued expenses payable 50,000 45,000 5,000 Deduct

Table (5)

Calculate the amount of depreciation expense:

Amount of depreciation expense =( Ending balance - Beginning�

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