Concept explainers
Prepare statement of cash flows using the indirect method for presenting cash flows from operating activities.
Answer to Problem 1PB
Prepare statement of cash flows (Indirect Method).
M Equipment Company | ||
Statement of Cash Flows - Indirect Method | ||
For the Year Ended December 31, 2016 | ||
Details | Amount ($) | Amount ($) |
Cash flows from operating activities: | ||
Net income | 141,680 | |
Adjustments to reconcile net income to net cash flow from operating activities: | ||
14,790 | ||
Loss on sale of investments | 10,200 | |
Changes in current operating assets and liabilities: | ||
Increase in | (19,040) | |
Increase in inventory | (8,670) | |
Increase in accounts payable | 11,560 | |
Increase in accrued expense payable | 3,740 | (12,580) |
Net cash provided by operating activities | $154,260 | |
Cash flows from investing activities: | ||
Cash received from sale of investment | 91,800 | |
Cash used for purchase of land | (295,800) | |
Cash used for purchase of equipment | (80,580) | |
Net cash used for investing activities | ($284,580) | |
Cash flows from financing activities: | ||
Cash received from sale of common stock | 250,000 | |
Cash used for dividends | (96,900) | |
Net cash provided by financing activities | $153,100 | |
Increase (decrease) in cash | $22,780 | |
Cash at the beginning of the year | 47,940 | |
Cash at the end of the year | $70,720 |
Table (1)
Explanation of Solution
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 (2)
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 (3)
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 (4)
Working notes:
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 | 188,190 | 207,230 | 19,040 | Deduct |
Inventories | 289,850 | 298,520 | 8,670 | Deduct |
Accounts payable | 194,1400 | 205,700 | 11,560 | Add |
Accrued expenses payable | 26,860 | 30,600 | 3,740 | Add |
Table (5)
Calculate the amount of depreciation expense:
Calculate the amount of loss on sale of investments:
Calculate the amount of dividends:
Therefore, the ending cash balance is $70,720.
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Chapter 16 Solutions
Cengagenow For Financial Accounting
- The comparative balance sheet of Prime Sports Gear, Inc., at December 31, the end of the fiscal year, is as follows: Additional data obtained from the records of Prime Sports Gear are as follows: a. Net income for 2013 was 121,610. b. Depreciation reported on income statement for 2013 was 46,500. c. Purchased 165,000 of new equipment, putting 90,000 cash down and issuing 75,000 of bonds for the balance. d. Old equipment originally costing 19,500, with accumulated depreciation of 7,950, was sold for 8,000. e. Retired 60,000 of bonds. f. Declared cash dividends of 64,000. g. Issued 1,500 shares of common stock at 27 cash per share. Open the file CASHFLOW from the website for this book at cengagebrain.com. First, enter the formulas. Then, complete the worksheet in the manner described next. According to the problem, cash increased from 39,600 to 67,210 during the year. This is a 27,610 increase. To record this increase on the worksheet, move to row 17. Since this is the first account you are analyzing, enter the letter a in column C. Then enter 27610 in column D (a debit since cash increased). This brings the year-end balance (column G) to 67,210, its proper balance. Now move to the bottom part of the statement where you see the categories Operating Activities, Investing Activities, and so on. The credit side of the entry has to be entered here. The proper space for this cash entry is on row 59. Enter the letter a in cell E59 and 27610 in cell F59. Notice the totals at the bottom of the page (row 60) now agree. The next account balance that changed is accounts receivable. It increased by 9,035. To enter this change on the worksheet, enter the letter b in cell C18 and 9035 in cell D18 (again, a debit since accounts receivable increased). This brings the year-end balance in column G to 121,250, its proper balance. The change in accounts receivable balance is an operating activity adjustment (as explained in your textbook). Enter the credit side of this entry in cells E34 and F34, and enter the explanation Increase in accounts receivable in cell A34. Note: Your textbook probably shows Net income as the first item under Operating Activities. We will get to that later. The sequence in which you enter items on this worksheet is not important. All other balance sheet accounts must be analyzed in the same manner, placing appropriate debit or credit entries in the top part of the worksheet to obtain the proper balances in column G, and then entering the second side of the entry in the appropriate row on the bottom part of the worksheet. You should use letter references to identify all entries. Also, you must enter a description of the entry in column A under the appropriate activity category. Although a sequence of analyzing the balance sheet from top to bottom is suggested here, this order is not necessary. As mentioned earlier, your textbook may specify a different sequence. Also, note that some accounts may have both debit and credit adjustments to them. The worksheet is not a substitute for a statement of cash flows, but it does provide you with all the numbers you need to properly prepare one. You will be done with your analysis when: a. The individual account balances at December 31, 2013, as shown on the worksheet (column G) equal those shown in the given problem data. b. The transaction column totals are equal (cells D60 and F60). c. The sum of the operating, investing, and financing activities (cell G59) equals the change in cash (cell D59 or F59). When you are finished, enter your name in cell A1. Save your completed file as CASHFLOW2. Print the worksheet when done. Also print your formulas. 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