INTERMEDIATE ACCOUNTING
INTERMEDIATE ACCOUNTING
8th Edition
ISBN: 9780078025839
Author: J. David Spiceland
Publisher: McGraw-Hill Education
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Chapter 21, Problem 21.32E
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: The Statement of cash flow for Company R, using the T-Accounts.

Expert Solution & Answer
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Explanation of Solution

Cash Account: (all amounts are in millions)

Cash Account
Date Details

Debit

($)

  Date Details

Credit

($)

December 31, 2016 Operating activities:   December 31, 2016 Operating activities:  
  From customers 1,954   To suppliers 1,523
          For expenses 456
  Investing activities:       Investing activities:  
  Sale of equipment 9     Purchase of equipment 230
  Financing activities:       Financing activities:  
  Issuance of notes 50     Payment of dividends 50
  Issuance of bonds 160        
          Balance 86

Table (4)

Accounts Receivable:

Accounts Receivable Account
Date Details

Debit

($)

  Date Details

Credit

($)

December 31, 2015 Beginning Balance 132 December 31, 2016 Closing Balance 178
  Balance (Increase) 46      

Table (5)

Prepaid Insurance:

Prepaid Insurance Account
Date Details

Debit

($)

  Date Details

Credit

($)

December 31, 2015 Beginning balance 3 December 31, 2016 Closing balance 7
  Balance (Increase) 4      

Table (6)

Inventory:

Inventory Account
Date Details

Debit

($)

  Date Details

Credit

($)

December 31, 2015 Beginning balance 175 December 31, 2016   285
  Balance (Increase) 110      

Table (7)

Buildings and Equipment:

Buildings and Equipment Account
Date Details

Debit

($)

  Date Details

Credit

($)

December 31, 2015 Beginning balance 350 December 31, 2016 Sold 180
December 31, 2016 Depreciation expense 50 December 31, 2016 Ending balance 400
  Purchase of equipment 230      

Table (8)

Accumulated Depreciation:

Accumulated Depreciation Account
Date Details

Debit

($)

  Date Details

Credit

($)

December 31, 2015 Beginning balance 240 December 31, 2016 Ending balance 119
December 31, 2016 Accumulated depreciation 121 December 31, 2016 Balance 50
  Depreciation 171      

Table (9)

Accounts Payable:

Accounts Payable Account
Date Details

Debit

($)

  Date Details

Credit

($)

December 31, 2016 Ending balance 87 December 31, 2015 Beginning balance 100
December 31, 2016 Balance (Decrease) 13      
           

Table (10)

Accrued Expenses Payable:

Accrued Expenses Payable Account
Date Details

Debit

($)

  Date Details

Credit

($)

December 31, 2016 Ending balance 6 December 31, 2015 Beginning balance 11
December 31, 2016 Balance (Decrease) 5      

Table (11)

Notes Payable:

Notes Payable Account
Date Details

Debit

($)

  Date Details

Credit

($)

      December 31, 2015 Beginning balance 0
December 31, 2016 Ending balance 50 December 31, 2016 Balance 50

Table (12)

Bonds Payable:

Bonds Payable Account
Date Details

Debit

($)

  Date Details

Credit

($)

      December 31, 2015 Beginning balance 0
December 31, 2016 Ending balance 160   Balance 160

Table (13)

Retained Earnings:

Retained Earnings Account
Date Details

Debit

($)

  Date Details

Credit

($)

December 31, 2016 Dividends 50 December 31, 2016 Balance of retained earnings 53
        Balance 103

Table (14)

Prepare T-account for income statement account of R Incorporation for the year ended December 31, 2016:

Sales:

Sales Account
Date Details

Debit

($)

  Date Details

Credit

($)

      December 31, 2016 Sales revenue 2,000
        Balance 2,000

Table (15)

Cost of Goods Sold:

Cost of Goods Sold Account
Date Details

Debit

($)

  Date Details

Credit

($)

December 31, 2016 Cost of Goods Sold 1,400      
  Balance 1,400      

Table (16)

Depreciation Expense:

Depreciation Expense Account
Date Details

Debit

($)

  Date Details

Credit

($)

December 31, 2016 Depreciation Expense 50      
  Balance 50      

Table (17)

Operating Expense:

Operating Expense Account
Date Details

Debit

($)

  Date Details

Credit

($)

December 31, 2016 Operating Expense 447      
  Balance 447      

Table (18)

Net income (income summary):

Net Income (Income summary)Account
Date Details

Debit

($)

  Date Details

Credit

($)

December 31, 2016 Revenue 2,000 December 31, 2016 Cost of goods sold 1,400
December 31, 2016 Balance 103 December 31, 2016 Depreciation expense 50
      December 31, 2016 Operating expense 447

Table (19)

The statement of cash flow of Company R is as follows.

Company R
Statement of Cash Flows
Amount in Millions
Particulars Amount ($) Amount ($)
Operating activities:    
Cash Inflows:    
     From customers $1,954  
Cash Outflows:    
 To suppliers of goods ($1,523)  
     For operating expenses ($456)  
Net cash used from operating activities   ($25)
Investing activities:    
     Sale of equipment ($230)  
 Purchase of equipment $9  
Net cash used from investing activities   ($221)
Financing activities:    
     Issuance of note payable $50  
     Issuance of bonds payable $160  
 Payment of cash dividends ($50)  
Net cash provided by financing activities   $160
Net decrease in cash   ($86)
Cash balance, January 1, 2016   $110
Cash balance, December 31, 2016   $24

Table (20)

Calculate the amount of cash received from customer:

CashreceiptsfromCustomers]=Salesrevenue (+Decrease in Accounts ReceivableORIncrease in Accounts Receivable)=Sales revenue Increase in accounts receivables=$2,000$46=$1,954

Calculate the amount of cash paid to suppliers of goods:

(Cashpaid to suppliers)=Cost of Goods Sold (+Decrease in Accounts Payable/Increase in InventoryORIncrease in Accounts Payable /Decrease in Inventory)=(Cost of goods sold + Decrease in accounts payable + Increase in inventory)=$1,400+$13+$110=$1,523

Calculate the amount of cash paid for operating expenses:

(Cash payments for Operating  expenses)=Operating expenses(+Increase in prepaid of insurance+Decrease in other accrued liabilities)=Operating expense +(Increase in prepaid insurance+Decrease in accrued expense payable)=$447+$4+5=$447+$4+$5=$456

Calculate the amount of  proceeds  from sale of equipment:

Step 1: Calculate the amount of depreciation:

Depreciation = Purchase of equipment×95%=$180×95%=$171

Step 2: Calculate the amount of proceeds from sale of equipment:

Sale of equipment = (Purchase of equipment95%ofdepreciation)=$180$171=$9

Conclusion

The statement of cash flows of Company R shows opening balance of cash flows in the reporting year 2016 as $110 million and the closing balance of cash as $24 million.

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Chapter 21 Solutions

INTERMEDIATE ACCOUNTING

Ch. 21 - Perhaps the most noteworthy item reported on an...Ch. 21 - Prob. 21.12QCh. 21 - Given sales revenue of 200,000, how can it be...Ch. 21 - Prob. 21.14QCh. 21 - When determining the amount of cash paid for...Ch. 21 - Prob. 21.16QCh. 21 - When using the indirect method of determining net...Ch. 21 - Prob. 21.18QCh. 21 - Prob. 21.19QCh. 21 - Where can we find authoritative guidance for the...Ch. 21 - U.S. GAAP designates cash outflows for interest...Ch. 21 - Prob. 21.1BECh. 21 - Prob. 21.2BECh. 21 - Prob. 21.3BECh. 21 - Prob. 21.4BECh. 21 - Prob. 21.5BECh. 21 - Prob. 21.6BECh. 21 - BE 21–7 Installment note LO21–3, LO21–6 On...Ch. 21 - BE 21–8 Sale of land LO21–3, LO21–4, LO21–5 On...Ch. 21 - Investing activities LO215 Carter Containers sold...Ch. 21 - Financing activities LO216 Refer to the situation...Ch. 21 - Prob. 21.11BECh. 21 - Prob. 21.12BECh. 21 - Classification of cash flows LO213 through LO216...Ch. 21 - Determine cash paid to suppliers of merchandise ...Ch. 21 - Determine cash received from customers LO213...Ch. 21 - Prob. 21.4ECh. 21 - Prob. 21.5ECh. 21 - Prob. 21.6ECh. 21 - Determine cash paid for bond interest LO213...Ch. 21 - Determine cash paid for bond interest LO213 For...Ch. 21 - Determine cash paid for income taxes LO213...Ch. 21 - Prob. 21.10ECh. 21 - E21–11 Bonds; statement of cash flow...Ch. 21 - E21–12 Installment note: statement of cash flow...Ch. 21 - Prob. 21.13ECh. 21 - E 21–14 Identifying cash flows from investing...Ch. 21 - E 21–15 Lease; lessee; statement of cash flows...Ch. 21 - Prob. 21.16ECh. 21 - Indirect method; reconciliation of net income to...Ch. 21 - Prob. 21.18ECh. 21 - Prob. 21.19ECh. 21 - Prob. 21.20ECh. 21 - Prob. 21.21ECh. 21 - Indirect method; reconciliation of net income to...Ch. 21 - Prob. 21.23ECh. 21 - Prob. 21.24ECh. 21 - Prob. 21.25ECh. 21 - Prob. 21.26ECh. 21 - Prob. 21.27ECh. 21 - Prob. 21.28ECh. 21 - Prob. 21.29ECh. 21 - Prob. 21.30ECh. 21 - Prob. 21.31ECh. 21 - Prob. 21.32ECh. 21 - Prob. 1CPACh. 21 - Prob. 2CPACh. 21 - Prob. 3CPACh. 21 - Prob. 4CPACh. 21 - Prob. 5CPACh. 21 - Prob. 6CPACh. 21 - Prob. 7CPACh. 21 - Prob. 8CPACh. 21 - Prob. 9CPACh. 21 - Prob. 1CMACh. 21 - Prob. 2CMACh. 21 - Prob. 3CMACh. 21 - Prob. 21.1PCh. 21 - Prob. 21.2PCh. 21 - Prob. 21.3PCh. 21 - Prob. 21.4PCh. 21 - Prob. 21.5PCh. 21 - Prob. 21.6PCh. 21 - Prob. 21.7PCh. 21 - Prob. 21.8PCh. 21 - Prob. 21.9PCh. 21 - Prob. 21.10PCh. 21 - Prob. 21.11PCh. 21 - Prob. 21.12PCh. 21 - Prob. 21.13PCh. 21 - Prob. 21.14PCh. 21 - Prob. 21.15PCh. 21 - Prob. 21.16PCh. 21 - Prob. 21.17PCh. 21 - Prob. 21.18PCh. 21 - Prob. 21.19PCh. 21 - Prob. 21.20PCh. 21 - Prob. 21.21PCh. 21 - Prob. 21.1BYPCh. 21 - Prob. 21.2BYPCh. 21 - Prob. 21.3BYPCh. 21 - Prob. 21.5BYPCh. 21 - Prob. 21.6BYPCh. 21 - Prob. 21.7BYPCh. 21 - Prob. 21.8BYPCh. 21 - Prob. 21.10BYPCh. 21 - Research Case 219 FASB codification; locate and...Ch. 21 - IFRS Case 2110 Statement of cash flows...
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