Chapter 21, Problem 21.18P

Statement of cash flows; indirect method

• LO21–4, LO21–8

Refer to the data provided in the P 21–11 for Arduous Company.

Required:

Prepare the statement of cash flows for Arduous Company using the indirect method. (Note: The following problems use the technique learned in Appendix 21B.)

P 21–11 Prepare a statement of cash flows; direct method

• LO21–3, LO21–8

The comparative balance sheets for 2018 and 2017 and the income statement for 2018 are given below for Arduous Company. Additional information from Arduous’s accounting records is provided also.

Additional information from the accounting records:

1. a. Investment revenue includes Arduous Company’s $6 million share of the net income of Demur Company, an equity method investee.
2. b. Treasury bills were sold during 2018 at a gain of $2 million. Arduous Company classifies its investments in Treasury bills as cash equivalents.
3. c. A machine originally costing $70 million that was one-half depreciated was rendered unusable by a flood. Most major components of the machine were unharmed and were sold for $17 million.
4. d. Temporary differences between pretax accounting income and taxable income caused the deferred income tax liability to increase by $3 million.
5. e. The preferred stock of Tory Corporation was purchased for $25 million as a long-term investment.
6. f. Land costing $46 million was acquired by issuing $23 million cash and a 15%, four-year, $23 million note payable to the seller.
7. g. The right to use a building was acquired with a 15-year lease agreement; present value of lease payments, $82 million. Annual lease payments of $7 million are paid at the beginning of each year starting January 1, 2018.
8. h. $60 million of bonds were retired at maturity.
9. i. In February, Arduous issued a 4% stock dividend (4 million shares). The market price of the $5 par value common stock was $7.50 per share at that time.
10. j. In April, 1 million shares of common stock were repurchased as treasury stock at a cost of $9 million.

Required:

Prepare the statement of cash flows of Arduous Company for the year ended December 31, 2018. Present cash flows from operating activities by the direct method. (A reconciliation schedule is not required.)

To determine

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.

To Prepare: The statement of cash flows of Company A.

Explanation of Solution

Spreadsheet: The spreadsheet is a supplementary device which helps to prepare the adjusting entries and the statement of cash flows easier.  The spreadsheet is a working tool of the accountant but it is not a permanent accounting record.

The spreadsheet, for the statement of cash flow analysis, is shown below.

Company A
Spreadsheet for the Statement of Cash Flows
Amount in Millions
Particulars	December 31,2017 Amount ($)	Changes		December 31,2018 Amount ($)
		Debit ($)	Credit ($)
Assets
Current Assets
Cash	$81	(21) $28		$109
Accounts receivable	$194		(1) $4	$190
Investment revenue receivable	$4	(2) $2		$6
Inventory	$200	(4) $5		$205
Prepaid insurance	$8		(8) $4	$4
Long-term investment	$125	(2) $6 (13)  $25		$156
Land	$150	(14) $46*		$196
Buildings and equipment	$400	(15) $82*	(10) $70	$412
Less: Depreciation	($120)	(10) $35	(6) $12	($97)
Patent	$32		(7) $2	$30
Total current assets	$1,074			$1,211
Liabilities and Stockholders’ Equity
Liabilities
Accounts payable	$65	(4) $15		$50
Salaries payable	$11	(5) $5		$6
Bond interest payable	$4		(9) $4	$8
Income tax payable	$14	(11) $2		$12
Deferred tax liability	$8		(11) $3	$11
Notes payable	$0		(14) $23*	$23
Lease liability	$0	(15) $7	(15) $82*	$75
Bonds payable	$275	(16) $60		$215
Less: Discount	($25)		(9)  $3	($22)
Stockholders’ equity
Common Stock	$410		(17) $20	$430
Paid-in capital—excess of par	$85		(17) $10	$95
Preferred stock	$0		(18) $75	$75
Retained Earnings	$227	(17) $30/ (19)  $22	(12) $67	$242
Less: Treasury Stock	$0	(20)  $9		($9)
Total liabilities and stockholders’ equity	$1,074			$1,211
Statement of Cash Flows
Net income		(1)  $67
Adjustments for noncash effects:
Depreciation expense		(2) $12
Patent amortization expense		(3) $2
Amortization of discount		(4) $3
Decrease in accounts receivable		(5) $4
Increase in investment revenue receivable			(6) $2
Equity method income			(7) $6
Decrease in prepaid insurance		(8) $4
Increase in inventory			(9)  $5
Decrease in accounts payable			(10)  $15
Decrease in salaries payable			(11)  $5
Increase in interest payable		(12) $4
Decrease in tax payable			(13) $2
Increase in deferred tax liability		(14) $3
Loss on machine damage		(15) $18
Net cash flows				$82
Investing activities:
Sale of machine components		(15)  $17
Purchase of Long Term investment			(16) $25
Purchase of land			(17) $23
Net cash flows				($31)
Financing activities:
Payment on lease liability			(15) $7
Retirement of bonds payable			(19) $60
Sale of preferred stock		(21) $75
Payment of cash dividends			(22) $22
Purchase of treasury stock			(23) $9
Net cash flows				($23)
Net decrease in cash			(24)  $28	$28
Total		$588	$588

 Table (1)

Operating activities: Operating activities refer to the normal activities of a company to carry out the business. The examples for operating activities are purchase of inventory, payment of salary, sales, and others.

Investing activities: Investing activities refer to the activities carried out by a company for acquisition of long term assets. The examples for investing activities are purchase of equipment, long term investment, sale of land, and others.

Financing activities: Financing activities refer to the activities carried out by a company to mobilize funds to carry out the business activities. The examples for financing activities are purchase of bonds, issuance of common shares, and others.

The spreadsheet of Company A shows the analysis of cash flows in the reporting year 2018.

Company R
Statement of Cash Flows
For year ended December 31, 2018
Amount in Millions
Particulars	Amount ($)	Amount ($)
Net income	$67
Adjustments for non-cash effects:
Depreciation expense	$12
Patent amortization expense	$2
Amortization of discount	$3
Decrease in accounts receivable	$18
Changes in operating assets and liabilities:
Decrease in accounts receivable	$4
Increase in investment revenue receivable	($2)
Equity method income	($6)
Decrease in prepaid insurance	$4
Increase in inventory	($5)
Decrease in accounts payable	($15)
Decrease in salaries payable	($5)
Increase in interest payable	$4
Decrease in tax payable	($2)
Increase in deferred tax liability	$3
Net cash outflow from operating activities		$82
Investing activities:
Sale of machine components	$17
Purchase of Long Term investment	($25)
Purchase of land	($23)
Net cash flows from investing activities		($31)
Financing activities:
Payment on lease liability	($7)
Retirement of bonds payable	($60)
Sale of preferred stock	$75
Payment of cash dividends	($22)
Purchase of treasury stock	($9)
Net cash flows from financing activities		($23)
Net decrease in cash		$28
Cash balance, January 1, 2018		$81
Cash balance, December 31, 2018		$109

 Table (2)

The statement of cash flows of Company A, shows opening balance of cash flows for the reporting year 2018 as $81 million and the closing balance of cash as $109 million.

Note:

*Non Cash investing activity and financing activity:

• Company A acquired a building on 15 year lease for $82 million.
• Company A acquired a land for $46 million, by:
  • Paying Cash of $23 million;
  • Issuing 4-year note for $23 million.