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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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Inflows and Outflows Alfred Engineering Company is a young and growing producer of electronic measuring instruments and technical equipment. You have been retained by Alfred to advise it in the preparation of a statement of cash flows. For the fiscal year ended October 31, 2019, you have obtained the following information concerning certain events and transactions of Alfred:

  1. 1. The amount of reported earnings for the fiscal year was $800,000.
  2. 2. Depreciation expense of $240,000 was included in the earnings statement.
  3. 3. Uncollectible accounts receivable of $30,000 were written off against the allowance for uncollectible accounts. Also, $37,000 of bad debts expense was included in determining earnings for the fiscal year, and the same amount was added to the allowance for uncollectible accounts.
  4. 4. A gain of $4,700 was realized on the sale of a machine; it originally cost $75,000, of which $25,000 was undepreciated on the date of sale.
  5. 5. On July 2, 2019, a building and land were purchased for $600,000; Alfred gave in payment $100,000 cash, $200,000 market value of its unissued common stock, and a $300,000 mortgage.
  6. 6. Alfred owns 25,000 shares of Field Corporation, which represents 40% of the company. Alfred accounts for the investment using the equity method. Field paid a cash dividend of $1.50 per share on August 3, 2019. For the year ended December 31, 2019, Field reported net income of $225,000.
  7. 7. On August 3, 2019, $700,000 of Alfred’s convertible preferred stock was converted into $140,000 par value of its common stock. The preferred stock was originally issued at par.
  8. 8. The board of directors declared a $320,000 cash dividend on October 19, 2019, payable on November 16, 2019, to shareholders of record on November 5, 2019.

Required:

For each of the eight items, explain whether each is an inflow or outflow of cash and explain how it should be disclosed in Alfred’s statement of cash flows (indirect method) for the fiscal year ended October 31, 2019. If any item is neither an inflow nor outflow of cash, explain why it is not and indicate the disclosure, if any, that should be made of the item in Alfred’s statement of cash flows for the fiscal year ended October 31, 2019.

To determine

State whether the given item is an inflow or outflow of cash ; Explain the manner by which it is disclosed in the Company A’s  statement of cash flow for the fiscal year ended  October 31, 2019;state the manner it affects  if neither there is an inflow or outflow of  cash and also explain the reason for having  neither an inflow or outflow of cash and also explain  manner by  which this effect will be disclosed in the items of Company A’s statement of cash flow for the fiscal year ended  October 31, 2019.

Explanation

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. Statement of cash flows includes the changes in cash balance due to operating, investing, and financing activities.

Cash inflows: The amount of cash received by a company from the operating, investing, and financing activities of the business during a certain period is referred to as cash inflow.

Cash outflows: The amount of cash paid by a company for the operating, investing, and financing activities of the business during a certain period is referred to as cash outflow.

1. The reported earnings of A Company should be reported as an inflow of cash in the following manner.

ParticularsAmount($)
Operating Activities: 
Net income800,000

Table (1)

2. Depreciation expense of $240,000 for the current period reduced the amount of net

income reported as an inflow of cash from operations, but cash did not flow out of the

business as a result of this expense. Therefore, cash provided by operations is $240,000

greater than reported net income. Depreciation expense is added back to net income

to arrive at cash provided by operations.

Adjustments for differences between income flows and cash flows from operating activities:

ParticularsAmount($)
Operating Activities: 
Add: Depreciation expenses240,000

Table (2)

3.  The written-off $30,000 of accounts receivable does not appear on the

statement of cash flows. Rather, the net change from the previous year’s balance is

reported. If the total change in accounts receivable was the $30,000 write-off, it would

be reported as follows:

Adjustments for differences between income flows and cash flows from operating activities:

ParticularsAmount($)
Operating Activities: 
Add: Decrease in accounts receivable30,000

Table (3)

Similar to the net change in accounts receivable, the net change in allowance for uncollectible accounts is either added to net income if it is an increase, or deducted

if it is a decrease in net income in the operating activities section of the statement of cash flows.

In this case, the net change is an increase of $7,000 ($37,000 increase less the $30,000 write-off), which is reported as follows:

Adjustments for differences between income flows and cash flows from operating activities:

Add: Increase in allowance for uncollectible accounts $7,000

4. The $29,700 ($25,000 book value plus $4,700 gain) proceeds from the sale of the machine are an inflow of cash. However, net income was increased by the amount of the gain, though there was no cash flow in the business because of this gain. The gain must be deducted from net income to get net cash flow from operating activities. This transaction would appear on two sections of the statement of cash flows, as follows:

Adjustments for differences between income flows and cash flows from operating activities:

ParticularsAmount($)
Operating Activities: 
Less: Gain on sale of machine   (4,700)
Investing Activities: 
Proceeds from sale of machine29,700

Table (4)

5...

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