(1)
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 the ending balance of cash at the end of the accounting period.
Direct method:
This method uses the basis of cash for preparing the cash flows of statement.
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.
To prepare: A spreadsheet for the preparation of thestatement of cash flow of NI Company under direct method for the year ended December 31, 2018.
(1)
Explanation of Solution
Spreadsheet:
The spreadsheet is a supplementary device which helps to prepare the
Spreadsheet for the Statement of cash flows of NI Company:
NI Company | ||||
Spreadsheet for the Statement of Cash Flows | ||||
Amount in Millions | ||||
Particulars | December 31,2017 Amount ($) | Changes | December 31,2018 Amount ($) | |
Debit ($) | Credit ($) | |||
Assets | ||||
Assets | ||||
Cash | 55 | (18) 2 | 57 | |
|
170 | (1) 11 | 181 | |
Less: Allowance | (6) | (1) 2 | (8) | |
Prepaid insurance | 12 | (8) 5 | 7 | |
Inventory | 165 | (4) 5 | 170 | |
Long term investment | 90 | (2) 6 | (3) 30 | 66 |
Land | 150 | 150 | ||
Buildings and equipment | 270 | (13) 80 X | (10) 60 | 290 |
Less: Acc. depreciation | (75) | (10) 15 | (6) 25 | (85) |
Trademark | 25 | (7) 1 | 24 | |
Total assets | 856 | 852 | ||
Liabilities and |
||||
Liabilities | ||||
Accounts payable | 45 | (4) 15 | 30 | |
salaries payable | 8 | (5) 5 | 3 | |
15 | (11) 3 | 18 | ||
Lease liability | 0 | (13) 12 | X (13) 80 | 68 |
Bonds payable | 275 | (14) 130 | 145 | |
Less: Discount | (25) | (9) 3 | (22) | |
Stockholders’ equity | ||||
Common Stock | 290 | (15) 20 | 310 | |
Paid in capital –ex of par | 85 | (15) 10 | 95 | |
0 | (16) 50 | 50 | ||
|
163 | (17) 30 | (12) 22 | 155 |
Total liabilities and stockholders’ equity | 856 | 852 | ||
Income Statement | ||||
Revenues | ||||
Sales revenue | (1) 320 | 320 | ||
Investment revenue | (2) 15 | 15 | ||
Gain on sale of investments | (3) 5 | 5 | ||
Expenses | ||||
Cost of goods sold | (4) 125 | (125) | ||
Salaries expense | (5) 55 | (55) | ||
Depreciation expense | (6) 25 | (25) | ||
Trademark amortization | (7) 1 | (1) | ||
Bad debt expense | (1) 7 | (7) | ||
Insurance expense | (8) 13 | (13) | ||
Bond Interest expenses | (9) 30 | (30) | ||
Loss on building fire | (10) 42 | (42) | ||
Income tax expense | (11) 20 | (20) | ||
Net income | (12) 22 | 22 | ||
Statement of Cash Flows | ||||
Operating activities: | ||||
From customers | (1) 304 | |||
From investment revenue | (2) 9 | |||
To suppliers of goods | (4) 145 | |||
To employees | (5) 60 | |||
For insurance | (8) 8 | |||
For bond interest | (9) 27 | |||
For income taxes | (11) 17 | |||
Net cash flows | 56 | |||
Investing activities: | ||||
Sale of long term investment | (3) 35 | |||
Sale of building parts | (10) 3 | |||
Net cash flows | 38 | |||
Financing activities: | ||||
Payment on lease liability | (13) 12 | |||
Retirement of bonds payable | (14) 130 | |||
Sale of common stock | (15) 30 | |||
Sale of preferred stock | (16) 50 | |||
Payment of cash dividends | (17) 30 | |||
Net cash flows | (92) | |||
Net increase in cash | (18) 2 | 2 | ||
Total | 1,082 | 1,082 |
Table (1)
Note (X):
Purchase $80 million worth of equipment by 7-year lease is considered as non cash investing and financing activities.
(2)
To prepare: The statement of cash flows.
(2)
Explanation of Solution
The spreadsheet of NI Company shows the analysis of cash flows in the reporting year 2018.
NI Company | |||
Spreadsheet for the statement of cash flows | |||
Year ended December 31, 2018 | |||
Changes | |||
Details (December 31, 2017) | Debits ($) | Credits ($) | December 31, 2018 |
Statement of cash flows | |||
Operating activities: | |||
Cash inflows: | |||
From customers | 304 | ||
From investment revenue | 9 | ||
Cash outflows: | |||
To suppliers of goods | (145) | ||
To employees | (60) | ||
For insurance expense | (8) | ||
For bond interest expense | (27) | ||
For income taxes | (17) | ||
Net cash flows from operating activities | 56 | ||
Investing activities: | |||
Sale of long-term investment | 35 | ||
Sale of building parts | 3 | ||
Net cash flows from investing activities | 38 | ||
Financing activities: | |||
Payment on lease liability | (12) | ||
Retirement of bonds payable | (130) | ||
Sale of common stock | 30 | ||
Sale of preferred stock | 50 | ||
Payment of cash dividends | (30) | ||
Net cash flow from financing activities | (92) | ||
Net increase in cash | 2 | ||
Cash balance, January 1 | 55 | ||
Cash balance, December 31 | 57 |
Table (2)
Hence, the opening cash balance is $55 and the closing cash balance is $57.
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Chapter 21 Solutions
GEN CMB INTRM ACCTG; CNCT 9E 2
- Statement of cash flows direct method The comparative balance sheet of Martinez Inc. for December 31, 20Y4 and 20Y3, is as follows: Dec. 31, 20Y4 Dec. 31, 20Y3 Assets Cash 661,920 683,100 Accounts receivable (net) 992,640 914,400 Inventories 1,394,400 1,363,800 Investments 0 432,000 Land 960,000 0 Equipment 1,224,000 984,000 Accumulated depreciationequipment (481,500) (368,400) Total assets 4,751,460 4,008,900 Liabilities and Stockholders' Equity Accounts payable (merchandise creditors) 1,080,000 966,600 Accrued expenses payable (operating expenses) 67,800 79,200 Dividends payable 100,800 91,200 Common stock, 5 par 130,000 30,000 Paid in capital: Excess of issue price over parcommon stock 950,000 450,000 Retained earnings 2,422,860 2,391,900 Total liabilities and stockholders' equity 4,751,460 4,008,900 The income Statement for the year ended December 51. 20Y3. is as follows: Sales 4,512,000 Cost of goods sold 2,352,000 Gross profit 2,160,000 Operating expenses: Depredation expense 113,100 Other operating expenses 1,344,840 Total operating expenses 1,457,940 Operating income 702,060 Other income: Gain on sale of investments 156,000 Income before income tax 858,060 Income tax expense 299,100 Net income 558,960 Additional data obtained from an examination of the accounts in the ledger for 20Y3 are as follows: A. Equipment and land were acquired for cash. B. There were no disposals of equipment during the year. C. The investments were sold for 588,000 cash. D. The common stock was issued for cash. E. There was a 528,000 debit to Retained Earnings for cash dividends declared. 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