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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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(Appendix 21.1) Visual Inspection The following changes in account balances were taken from Walson Company’s adjusted trial balance at the end of 2019:

Chapter 21, Problem 21E, (Appendix 21.1) Visual Inspection The following changes in account balances were taken from Walson

In addition, the following information was obtained from the company’s records:

  • Land was sold, at cost, for $1,900.
  • Dividends of $4,000 were declared and paid.
  • Equipment was purchased for $10,400.
  • Common stock was issued for $9,000.
  • Beginning cash balance was $17,000.

Required:

Using visual inspection and the direct method, prepare Walson’s 2019 statement of cash flows. (A separate schedule reconciling net income to cash provided by operating activities is not necessary.)

To determine

Prepare cash flow statement under visual inspection method for W company.

Explanation

Statement of cash flows: Cash flow statement reports all the cash transactions which are responsible for inflow and outflow of cash. The results of these transactions are reported as ending balance of cash at the end of reported period. Statement of cash flows includes the changes in cash balance due to operating, investing, and financing activities.

Operating activities: Operating activities include cash inflows and outflows from business operations.

Investing activities: Investing activities include cash inflows and cash outflows from purchase and sale of land, equipment, or investments.

Financing activities: Financing activities includes cash inflows and outflows from issuance of common stock and debt, and payment of debt and dividends.

Visual inspection method: Visual inspection method is a process of reviewing a company’s financial statement and prepares cash flow statement without using a spreadsheet. This method is used when the company’s financial statement is simple and the relationship between changes in accounts can be easily analyzed.

Prepare cash flow statement using visual inspection method:

W Company
Statement of cash flow for the year ended December 31, 2019
ParticularsAmount($)Amount($)
Operating Activities:  
Cash inflows:  
Collections from customers (working note A)$60,300 
Cash inflow from operating activities 60,300
Cash outflows: 
Payments to suppliers (working note B)36,000 
Payments to employees (working note C)16,400 
Payments of income taxes (working note D)2,300 
Cash outflows for operating activities(54,700)
Net cash provided by operating activities5,600
Investing Activities:  
Proceeds from sale of land$1,900 
Payment for purchase of equipment(10,400) 
Net cash used for investing activities $(8,500)
Financing Activities:  
Proceeds from issuance of common stock9,000 
Payment of dividends(4,000) 
Net cash provided by financing activities $5,000
Net increase in cash $2,100
Cash on January 1, 2019 17,000
Cash on December 31,2019 $19,100

Table (1)

Working note A:

Calculate collections from customers.

Sales revenue{+Decrease accounts receivable                       Or- Increase in accounts receivable+Increase in deferred revenue                       Or-Decrease in deferred revenue}= Collections from customers

Collections from customers = (Sales - increase in accounts receivable)=($69,000 - $8,700)=$60,300

Working note B:

Calculate Payments to suppliers

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