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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 Yellow Dog Enterprises Inc. at December 31, 20Y8 and 20Y7, is as follows:

  Dec. 31, 20Y8 Dec. 31, 20Y7
Assets    
Cash $ 80,000 S 100,000
Accounts receivable (net) 275,000 300,000
Merchandise inventory 510,000 400,000
Prepaid expenses 15,000 10,000
Equipment 1,070,000 750,000
Accumulated depreciation—equipment (200,000) (160,000)
Total assets. $1,750,000 $1,400,000
Liabilities and Stockholders' Equity:
Accounts payable (merchandise creditors) $ 100,000 $ 90,000
Mortgage note payable 0 400,000
Common stock, $10 par 600,000 200,000
Paid-in capital: Excess of issue price over par—common stock 300,000 100,000
Retained earnings 750,000 610,000
Total liabilities and stockholders' equity $1,750,000 $1,400,000

Additional data obtained from the income statement and from an examination of the accounts in the ledger for 20Y8 are as follows:

a. Net income, $190,000.

b. Depreciation reported on the income statement, $115,000.

c. Equipment was purchased at a cost of $395,000, and fully depreciated equipment costing $75,000 was discarded, with no salvage realized.

d. The mortgage note payable was not due for six years, but the terms permitted earlier payment without penalty.

e. 40,000 shares of common stock were issued at $15 for cash.

f. Cash dividends declared and paid, $50,000.

Instructions

Prepare a statement of cash flows, using the indirect method.

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 300,000 275,000 (25,000) Add
Merchandised inventories 400,000 510,000 110,000 Deduct
Prepaid expenses 10,000 15,000

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