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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 Whitman Co. at December 31, 20Y2 and 20Y1, is as follows:

Dec. 31, 20Y2 Dec. 31, 20Y1
Assets
Cash. $ 918,000 $ 964,800
Accounts receivable (net) 828,900 761,940
Inventories 1,268,460 1,162,980
Prepaid expenses 29,340 35,100
Land 315,900 479,700
Buildings 1,462.500 900,900
Accumulated depreciation—buildings (408,00) (382,320)
Equipment 512,280 454,680
Accumulated depreciation—equipment (141,300) (158,760)
Total assets $4,785,480 $4,219,020
Liabilities and Stockholders' Equity
Accounts payable (merchandise creditors) $ 922,500 $ 958.320
Bonds payable 270,000 0
Common stock. $25 par 317,000 117,000
Paid-in capital: Excess of issue price over par—common stock 758,000 558,000
Retained earnings 2,517,980 2,585,700
Total liabilities and stockholders' equity $4,785,480 $4,219,020

The noncurrent asset, noncurrent liability, and stockholders' equity accounts for 20Y2 are as follows:

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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 761,940 828,900 (66,960) Add
Merchandised inventories 1,162,980 1,268,460 105,480 Deduct
Prepaid expenses 35,100 5,760 29,340 Deduct
Accounts payable 958,320 922,500 35,820 Add

Table (5)

Calculate the amount of cash received from common stock:

Cash received from common stock = [Common stock @ Par value (1)+

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