Chapter 21, Problem 21.20P

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.

Direct method: The direct method uses the cash basis of accounting for the preparation of the statement of cash flows. It takes into account those revenues and expenses for which cash is either received or paid.

Cash flows from operating activities: Cash flows from operating activity represent the net cash flows from the general operation of the business by comparing the cash receipt and cash payments.

Cash Receipts: It encompasses all the cash receipts from sale of goods and on account receivable.

Cash Payments: It encompasses all the cash payments that are made to suppliers of goods and all expenses that are paid.

The below table shows the way of calculation of cash flows from operating activities:

Cash flows from operating activities (Direct method)

Add: Cash receipts.

Cash receipt from customer

Less: Cash payments:

To supplier

For operating expenses

Income tax expenses

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

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)

T-Account: For all the business transactions, journal entries are passed and are transferred to the respective ledger accounts where it is recorded and summarized in either side of the ‘T’ format.

To Prepare: T-account for balance sheet account of M Industries for the year ended December 31, 2016.

Explanation of Solution

Cash Account: (all amounts are in 000s)

Cash Account
Date	Details	Debit ($)		Date	Details	Credit ($)
December 31, 2016	Operatingactivities:			December 31, 2016	Operatingactivities:
	From customers	2,495			To suppliers of goods	675
					For expense	425
	Investing activities:				Investing activities:
	Sale of land	165			Purchase of equipment	900
	Sale of equipment	15
	Financing activities:				Financing activities:
					Payment of dividends	450
	Balance	225

Table (4)

Accounts Receivable:

Accounts Receivable Account
Date	Details	Debit ($)		Date	Details	Credit ($)
December 31, 2016	Increase in accounts receivable	150
	Balance	150

Table (5)

Inventory:

Inventory Account
Date	Details	Debit ($)		Date	Details	Credit ($)
December 31, 2016	Increase in inventory	375
	Balance	375

Table (6)

Land:

Land Account
Date	Details	Debit ($)		Date	Details	Credit ($)
December 31, 2016	Increase in land	75
	Lease liability	150		December 31, 2016	Balance	75

Table (7)

Accumulated Depreciation - Building:

Accumulated Depreciation – Building Account
Date	Details	Debit ($)		Date	Details	Credit ($)
				December 31, 2016	Accumulated depreciation	30
				December 31, 2016	Balance	30

Table (8)

Equipment:

Equipment Account
Date	Details	Debit ($)		Date	Details	Credit ($)
December 31, 2016	Increase in equipment	600		December 31, 2016	Sale of equipment	300
December 31, 2016	Balance	900

Table (9)

Accumulated Depreciation - Equipment:

Accumulated Depreciation - Equipment Account
Date	Details	Debit ($)		Date	Details	Credit ($)
				December 31, 2016	Accumulated depreciation	45
December 31, 2016	Increase in equipment	270		December 31, 2016	Balance	315

Table (10)

Patent:

Patent Account
Date	Details	Debit ($)		Date	Details	Credit ($)
				December 31, 2016	Decrease in patent	300
				December 31, 2016	Balance	300

Accounts Payable:

Accounts Payable Account
Date	Details	Debit ($)		Date	Details	Credit ($)
				December 31, 2016	Increase in accounts payable	300
					Balance	300

Table (11)

Accrued Expense Payable:

Accrued Expense Payable Account
Date	Details	Debit ($)		Date	Details	Credit ($)
				December 31, 2016	Increase in accrued expense payable	75
					Balance	75

Table (12)

Lease Liability – Land:

Lease Liability – LandAccount
Date	Details	Debit ($)		Date	Details	Credit ($)
				December 31, 2016	Increase in lease liability	150
					Balance	150

Table (13)

Common Stock:

Common Stock Account
Date	Details	Debit ($)		Date	Details	Credit ($)
				December 31, 2016	Increase in common stock	150
					Balance	150

Table (14)

Paid-in Capital:

Paid-in Capital Account
Date	Details	Debit ($)		Date	Details	Credit ($)
				December 31, 2016	Increase in paid-in capital	75
					Balance	75

Table (15)

Retained Earnings:

Retained Earnings Account
Date	Details	Debit ($)		Date	Details	Credit ($)
December 31, 2016				December 31, 2016	Balance of retained earnings	300
	Payment of cash dividend	450			Balance	975
	Retained earning	225

Table (16)

Sales:

Sales Account
Date	Details	Debit ($)		Date	Details	Credit ($)
				December 31, 2016	Sales revenue	2,645
					Balance	2,645

Table (17)

Gain on Sale of Land:

Gain on Sale of Land Account
Date	Details	Debit ($)		Date	Details	Credit ($)
				December 31, 2016	Gain on sale of land	90
					Balance	90

Table (18)

Cost of Goods Sold:

Cost of Goods Sold Account
Date	Details	Debit ($)		Date	Details	Credit ($)
December 31, 2016	Cost of Goods Sold	600
	Balance	600

Table (19)

Depreciation Expense - Building:

Depreciation Expense – Building Account
Date	Details	Debit ($)		Date	Details	Credit ($)
December 31, 2016	Depreciation Expense - Building	30
	Balance	30

Table (20)

Depreciation Expense - Equipment:

Depreciation Expense – Equipment Account
Date	Details	Debit ($)		Date	Details	Credit ($)
December 31, 2016	Depreciation Expense – Equipment	315
	Balance	315

Table (21)

Loss on Sale of Equipment:

Loss on Sale of Equipment Account
Date	Details	Debit ($)		Date	Details	Credit ($)
December 31, 2016	Loss on sale of building	15
	Balance	15

Table (22)

Amortization of Patent:

Amortization of Patent Account
Date	Details	Debit ($)		Date	Details	Credit ($)
December 31, 2016	Amortization of patent	300
	Balance	300

Table (23)

Operating Expenses:

Operating Expenses Account
Date	Details	Debit ($)		Date	Details	Credit ($)
December 31, 2016	Operating expense	500
	Balance	500

Table (24)

Net income (income summary):

Net Income (income summary)Account
Date	Details	Debit ($)		Date	Details	Credit ($)
December 31, 2016	Net income	975
	Balance	975

Table (25)

To determine

To Prepare: The statement of cash flows using direct method for M Industries for the year ended December 31, 2016.

Answer to Problem 21.20P

Table (26)

Explanation of Solution

Working notes:

Calculate the amount of cash received from customers:

$\begin{array}{c}\begin{array}{l}\text{Cash}\text{receipts}\\ \text{from }\text{Customers}\end{array}]=\text{Sales}\text{revenue }\left(\begin{array}{l}+\text{Decrease in Accounts Receivable}\\ \text{OR}\\ -\text{Increase in Accounts Receivable}\end{array}\right)\\ =\text{Sales revenue}-\text{Increase in accounts receivables}\\ =\$2,645-\$150\\ =\$2,495\end{array}$

Calculate the amount of cash paid to suppliers:

$\begin{array}{c}\left(\begin{array}{l}\text{Cash}\text{paid }\\ \text{to }\text{suppliers}\end{array}\right)=\text{Cost of Goods Sold }\left(\begin{array}{l}+\text{Decrease in Accounts Payable}\\ \text{/}\text{Increase in Inventory}\\ \text{OR}\\ -\text{Increase in Accounts Payable }\\ \text{/}\text{Decrease in Inventory}\end{array}\right)\\ =\left(\begin{array}{l}\text{Cost of goods sold }-\text{Increase in accounts payable}\\ \text{ + Increase in inventory}\end{array}\right)\\ =\$600-\$300+\$375\\ =\$675\end{array}$

Calculate the amount of cash paid for operating expenses:

$\begin{array}{c}\left(\begin{array}{l}\text{Cash paid for }\\ \text{Operating expenses}\end{array}\right)=\left(\begin{array}{l}\text{Operating expenses }-\\ \text{Increase in other accrued liabilities}\end{array}\right)\\ =\left(\begin{array}{l}\text{Operating expense }-\\ \text{Increase in accrued expenses payable}\end{array}\right)\\ =\$500-75\\ =\$425\end{array}$

Calculate the amount of purchase of equipment:

$\begin{array}{l}\text{Ending balance =}\left[\begin{array}{l}\left(\text{ Beginning balance + Purchase}\right)\\ -\text{Sales}\end{array}\right]\\ \Rightarrow \text{Purchase }\text{ = }\left[\begin{array}{l}\left(\text{Ending balance + Sales}\right)\\ -\text{Beginning balance}\end{array}\right]\\ \Rightarrow \text{Purchase }\text{ = }\left[\left(\$2,850+\$300\right)-\$2,250\right]\\ \Rightarrow \text{Purchase }\text{ = \$3,150}-\$2,250\\ \Rightarrow \text{Purchase }\text{ =}\$900\end{array}$

Calculate the amount of sale of land:

$\begin{array}{l}\text{Ending balance =}\left[\begin{array}{l}\left(\text{ Beginning balance + Gain on sale of land}\right)\\ -\text{Sales}\end{array}\right]\\ \Rightarrow \text{Sales }\text{=}\left[\begin{array}{l}\left(\text{Ending balance + Gain on sale of land}\right)\\ -\text{Beginning balance}\end{array}\right]\\ \Rightarrow \text{Sales }\text{ = }\left[\left(\$675+\$90\right)-\$600\right]\\ \Rightarrow \text{Sales}\text{ =}\left(\text{\$765}-\$600\right)\\ \Rightarrow \text{Sales }\text{ =}\$165\end{array}$

Conclusion

Hence, the opening cash balance is $375 million and closing cash balance is $600 million.