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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 Harris Industries Inc. at December 31, 20Y4 and 20Y3, is as follows:

  Dec 31, 20Y4 Dec 31, 20Y3
Assets    
Cash $ 443,240 $ 360,920
Accounts receivable (net) 665,280 592,200
Inventories 887,880 1,022,560
Prepaid expenses 31,640 25,200
Land 302,400 302,400
Buildings 1,713,600 1,134,000
Accumulated depreciation—buildings (466,200) (414,540)
Machinery and equipment 781,200 781,200
Accumulated depreciation—machinery and equipment (214,200) (191,520)
Patents 106,960 112,000
Total assets $4,251,800 $3,724,420
Liabilities and Stockholders' Equity    
Accounts payable $ 837,480 $ 927,080
Dividends payable 32,760 25,200
Salaries payable 78,960 87,080
Mortgage note payable, due in 10 years 224,000 0
Bonds payable 0 390,000
Common stock, $S par 200,400 50,400
Paid-in capital: Excess of issue price over par—common stock 366,000 126,000
Retained earnings 2,512,200 2,118,660
Total liabilities and stockholders' equity $4,251,800 $3,724,420

An examination of the income statement and the accounting records revealed the following additional information applicable to 20Y4:

a. Net income, $524,580.

b. Depreciation expense reported on the income statement: buildings, $51,660; machinery and equipment, $22,680.

c. Patent amortization reported on the income statement, $5,040.

d. A building was constructed for $579,600.

e. A mortgage note for $224,000 was issued for cash.

f. 30.000 shares of common stock were issued at $13 in exchange for the bonds payable.

g. Cash dividends declared, $131,040.

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 592,200 665,280 73,080 Deduct
Inventories 1,022,560 887,880 (134,680) Add
Prepaid expenses 25,200 31,640 6,440 Deduct
Accounts payable 927,080 837,480 (89,600) Deduct
Salaries payable 87,080

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