Chapter 21, Problem 21.21P

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 flow for Company A, using the T-Accounts.

Explanation of Solution

T-account: T-account is the form of the ledger account, where the journal entries are posted to this account. It is referred to as the T-account, because the alignment of the components of the account resembles the capital letter ‘T’.

The components of the T-account are as follows:

a)      The title of the account

b)      The left or debit side

c)      The right or credit side

The T-accounts for Company A, for various accounts are shown below:

Cash Account:

Cash (Statement of Cash Flows) (Amount in millions)
		(13)  $86	Cash Balance
Operating activities:
From customers	(1) $414	(4)  $200	To suppliers of goods
From investment revenue	(2) $3	(5)  $78	To employees
From sale of cash equivalents	(3) $2	(8)  $3	For insurance
		(9)  $21	For bond interest
		(11)  $35	For income taxes
Investing activities:
Sale of machine components	(10)  $17	(13) $25	Purchase of Long Term    Investment
		(14) $23	Purchase of land
Financing activities:
Sale of preferred stock	(18) $75	(15) $7	Payment on lease liability
		(16) $60	Retirement of bonds payable
		(19) $22	Payment of cash dividends
		(20) $9	Purchase of treasury stock

 Table (1)

Long Term investment (Amount in millions)
Increase in Long Term investment	$31
Opening Balance	$125	$156	Closing Balance
Land (Amount in millions)
Increase in investment revenue receivable	$46
Opening Balance	$150	$196	Closing Balance
Patent (Amount in millions)
		$2	Decrease in patent
Opening Balance	$32	$30	Closing Balance
Buildings and Equipment (Amount in millions)
Increase in buildings and equipment	$12
Opening Balance	$400	$412	Closing Balance
Accumulated Depreciation (Amount in millions)
Decrease in accumulated depreciation	$23
Opening Balance	$120	$97	Closing Balance
Accounts payable (Amount in millions)
Decrease in accounts payable	$15
Opening Balance	$65	$50	Closing Balance
Salaries Payable (Amount in millions)
Decrease in salaries payable	$5
Opening Balance	$11	$6	Closing Balance
Notes Payable (Amount in millions)
		$23	Increase  in Notes Payable
Opening Balance	$0	$23	Closing Balance
Bonds Payable (Amount in millions)
Decrease  in Bonds Payable	$60
Opening Balance	$275	$215	Closing Balance
Retained earnings (Amount in millions)
		$15	Increase  in Retained earnings
Opening Balance	$227	$242	Net Income
Bond Interest Payable (Amount in millions)
		$4	Increase  in Bond Interest Payable
Opening Balance	$4	$8	Closing Balance
Income tax payable (Amount in millions)
Decrease in Income tax payable	$2
Opening Balance	$14	$12	Closing Balance
Deferred tax liability  (Amount in millions)
		$3	Increase  in Deferred tax liability
Opening Balance	$8	$11	Closing Balance
Lease liability  (Amount in millions)
		$75	Increase  in Lease liability
Opening Balance	$8	$75	Closing Balance
Discount on Bonds  (Amount in millions)
		$3	Increase  in Discount on Bonds
Opening Balance	$0	$3	Closing Balance
Common Stock (Amount in millions)
		$20	Increase  in Common Stock
Opening Balance	$410	$430	Closing Balance
Paid-in capital  (Amount in millions)
		$10	Increase  in  Paid-in capital
Opening Balance	$85	$95	Closing Balance
Preferred stock  (Amount in millions)
		$75	Increase  in Preferred stock
Opening Balance	$0	$75	Closing Balance
Treasury Stock  (Amount in millions)
Increase  in Treasury Stock	$9
Opening Balance	$0	$9	Closing Balance
Sales revenue  (Amount in millions)
		$410	Increase  in Sales revenue
Opening Balance	$0	$410	Closing Balance
Investment revenue  (Amount in millions)
		$11	Increase  in Investment revenue
Opening Balance	$0	$11	Closing Balance
Gain on sale of treasury bills  (Amount in millions)
		$2	Gain on sale of treasury bills
Opening Balance	$0	$2	Closing Balance
Cost of goods sold (Amount in millions)
Cost of goods sold	$180
Opening Balance	$0	$180	Closing Balance
Salaries expense (Amount in millions)
Salaries expense	$73
Opening Balance	$0	$73	Closing Balance
Depreciation expense (Amount in millions)
Depreciation expense	$12
Opening Balance	$0	$12	Closing Balance
Patent amortization expense (Amount in millions)
Patent amortization expense	$2
Opening Balance	$0	$2	Closing Balance
Insurance expense (Amount in millions)
Insurance expense	$7
Opening Balance	$0	$7	Closing Balance
Bond interest expense (Amount in millions)
Bond interest expense	$28
Opening Balance	$0	$28	Closing Balance
Loss on machine damage (Amount in millions)
Loss on machine damage	$18
Opening Balance	$0	$18	Closing Balance
Income tax expense (Amount in millions)
Income tax expense	$36
Opening Balance	$0	$36	Closing Balance
Net income (Amount in millions)
Net income	$67
Opening Balance	$0	$67	Closing Balance

The Statement of cash flow of Company A is as follows.

Company A
Statement of Cash Flows
For year ended December 31, 2018
Amount in Millions
Particulars	Amount ($)	Amount ($)
Operating activities:
Cash Inflows:
From customers	$414
From investment revenue	$3
From sale of cash equivalents	$2
Cash Outflows:
To suppliers of goods	($200)
To employees	($78)
For insurance	($3)
For bond interest	($21)
For income taxes	($35)
Net cash flows 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.