Chapter 21, Problem 16P

Comprehensive The following are Farrell Corporation’s balance sheets as of December 31, 2019, and 2018, and the statement of income and retained earnings for the year ended December 31, 2019:

Additional information:

1. a. On January 2, 2019, Farrell sold equipment costing $45,000, with a book value of $24,000, for $19,000 cash.
2. b. On April 2, 2019, Farrell issued 1, 000 shares of common stock for $23,000 cash.
3. c. On May 14, 2019, Farrell sold all of its treasury stock for $25,000 cash.
4. d. On June 1, 2019, Farrell paid $50, 000 to retire bonds with a face value (and book value) of $50, 000.
5. e. On July 2, 2019, Farrell purchased equipment for $63, 000 cash.
6. f. On December 31, 2019, land with a fair market value of $150,000 was purchased through the issuance of a long-term note in the amount of $150,000. The note bears interest at the rate of 15% and is due on December 31, 2021.
7. g. Deferred taxes payable represent temporary differences relating to the use of accelerated depreciation methods for income tax reporting and the straight-line method for financial statement reporting.

Required:

1. 1. Prepare a spreadsheet to support a statement of cash flows for Farrell for the year ended December 31, 2019, based on the preceding information.
2. 2. Prepare the statement of cash flows.

(Appendix 21.1) Spreadsheet and Statement Refer to the information for Farrell Corporation in P21-13.

Required:

1. 1. Using the direct method for operating cash flows, prepare a spreadsheet to support a 2019 statement of cash flows. (Hint: Combine the income statement and December 31, 2019, balance sheet items for the adjusted trial balance. Use a retained earnings balance of $291,000 in this adjusted trial balance.)
2. 2. Prepare the statement of cash flows. (A separate schedule reconciling net income to cash provided by operating activities is not necessary.)

To determine

Prepare a spreadsheet to support the statement of cash flows under direct method of F Company for the year ended December 31, 2019.

Explanation of Solution

Statement of cash flows: This statement reports all the cash transactions which are responsible for inflow and outflow of cash, and result of these transactions is reported as ending balance of cash at the end of reported period. Statement of cash flows includes the changes in cash balance due to operating, investing, and financing activities.

Worksheet: A worksheet is a spreadsheet used while preparing a financial statement. It is a type of form having multiple columns and it is used in the adjustment process. The use of a worksheet is optional for any organization. A worksheet can neither be considered as a journal nor a part of the general ledger.

Prepare a spreadsheet to support the statement of cash flows under direct method.

Table (1)

Table (2)

Working notes:

a) Net sales for the year are $1,950,000.

b) Cost of goods sold is $1,150,000.

c) Other operating expenses are $505,000.

f) Interest expense is $15,000.

h) Loss on sale of equipment is $5,000.

i) Income tax expense is $90,000.

j) Calculate the accounts receivable.

$\begin{array}{l}\begin{array}{c}\text{Decrease in accounts receivable = }\left(\begin{array}{l}\text{Beginnig year's accounts receivable}\\ \text{ – Ending year's accounts receivable}\end{array}\right)\\ \text{= \$305,000}-\$2,95,00\\ =\$10,000\end{array}\hfill \\ \hfill \end{array}$

k) Calculate the increase in inventory.

$\begin{array}{c}\text{Increase in inventory}=\left(\begin{array}{l}\text{Beginning year's inventory}\\ -\text{Ending year's inventory}\end{array}\right)\\ =\$431,0000-\$549,000\\ =\$118,000\end{array}$

l) Calculate the accounts payable.

$\begin{array}{l}\begin{array}{c}\text{Increase in Accounts Payable = }\left(\begin{array}{l}\text{Beginnig year's accounts payable}\\ \text{ – Ending year's accounts payable}\end{array}\right)\\ \text{= \$563,000}-\$604,000\\ =\$41,000\end{array}\hfill \\ \hfill \end{array}$

m) Calculate the deferred tax

$\begin{array}{c}\text{Increase in Deferred Tax =}\left(\begin{array}{l}\text{Closing balance of deferred tax}\\ -\text{ Opening balance of deferred tax}\end{array}\right)\\ =\$30,000-\$41,000\\ =\$11,000\end{array}$

n) Calculate proceeds from sale of common stock.

$\begin{array}{c}\left(\begin{array}{l}\text{Proceeds from Sale }\\ \text{of Common Stock}\end{array}\right)=\left(\begin{array}{l}\text{Issuance of common stock}\\ +\text{Additional paid in capital}\end{array}\right)\\ =\$10,000+\$13,0000\\ =\$23,000\end{array}$

o) Calculate proceeds from sale of treasury stock.

$\begin{array}{c}\left(\begin{array}{l}\text{Proceeds from Sale }\\ \text{of Treasury Stock}\end{array}\right)=\left(\begin{array}{l}\text{Issuance of treasury stock}\\ +\text{Additional paid in capital}\end{array}\right)\\ =\$17,000+\$8,000\\ =\$25,000\end{array}$

p) Calculate the payment to retire bonds.

$\begin{array}{c}\text{Bonds payable}=\left(\begin{array}{l}\text{Beginning year's bonds payable}\\ -\text{Ending year's bonds payable}\end{array}\right)\\ =\$210,000-\$160,000\\ =\$50,000\end{array}$

q) Purchase of equipment is $63,000.

r-1) Issuance of long-term note is $150,000.

r-2) Calculate issuance of long-term note to purchase land.

$\begin{array}{c}\left(\begin{array}{l}\text{Issuance of Long-term}\\ \text{ Note to Purchase Land}\end{array}\right)=\left(\begin{array}{l}\text{Beginning year's purchase of land}\\ -\text{Ending year's purchase of land}\end{array}\right)\\ =\$350,000-200,000\\ =\$150,000\end{array}$

s) Payment of cash dividends is $43,000.

t) Calculate net increase in cash.

$\begin{array}{c}\text{Net increase in cash}=\left(\begin{array}{l}\text{Beginnig year's cash}\\ -\text{Ending year's cash}\end{array}\right)\\ =\$225,000-180,000\\ =\$45,000\end{array}$

Conclusion

Therefore, net increase in cash is $45,000.

To determine

Prepare a statement of cash flows of F Company for the year 2019.

Explanation of Solution

Prepare a statement of cash flows of F Company for the year 2019.

F Company
Statement of cash flows
For Year Ended December 31, 2019
Particulars	Amount($)	Amount($)
Operating Activities:
Cash inflows:
Collections from customers	1,960,000
Cash inflows from operating activities		1,960,000
Cash outflows:
Payments to suppliers	(1,227,000)
Other operating payments	(505,000)
Payments of interest	(15,000)
Payments of income taxes	(79,000)
Cash outflows from operating activities		(1,826,000)
Net cash provided by operating activities		134,000
Investing Activities:
Proceeds from sale of equipment	19,000
Payment for purchase of equipment	(63,000)
Net cash used for investing activities		(44,000)
Financing  Activities:
Proceeds from sale of common stock	23,000
Proceeds from sale of treasury stock	25,000
Payment to retire bonds	(50,000)
Payment of cash dividend	(43,000)
Net cash used for financing activities		(45,000)
Net increase in cash (see Schedule 1)		45,000
Cash, January 1, 2019		180,000
Cash, December 31,2019		225,000
Schedule 1: Investing and Financing Activities Not Affecting Cash
Investing Activities:
Purchase of land by issuance of long-term note		(150,000)
Financing  Activities:
Issuance of long-term note to purchase land		150,000

Table (3)

Conclusion

Therefore, the net increase in cash is $45,000.