College Accounting, Chapters 1-27 (New in Accounting from Heintz and Parry)
College Accounting, Chapters 1-27 (New in Accounting from Heintz and Parry)
22nd Edition
ISBN: 9781305666160
Author: James A. Heintz, Robert W. Parry
Publisher: Cengage Learning
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Textbook Question
Chapter 23, Problem 12SPB

EXPANDED STATEMENT OF CASH FLOWS Financial statements for McGinnis Company as well as additional information relevant to cash flows during the period are given below and on the next page.

Chapter 23, Problem 12SPB, EXPANDED STATEMENT OF CASH FLOWS Financial statements for McGinnis Company as well as additional , example  1

Chapter 23, Problem 12SPB, EXPANDED STATEMENT OF CASH FLOWS Financial statements for McGinnis Company as well as additional , example  2

Additional information:

1. Office equipment was sold in 20-2 for $35,000. Additional information on the office equipment sold is provided below.

Chapter 23, Problem 12SPB, EXPANDED STATEMENT OF CASH FLOWS Financial statements for McGinnis Company as well as additional , example  3

2. Depreciation expense for the year was $70,000.

3. The following purchases were made for cash:

Chapter 23, Problem 12SPB, EXPANDED STATEMENT OF CASH FLOWS Financial statements for McGinnis Company as well as additional , example  4

4. Declared and paid cash dividends of $40,000.

5. Issued 10,000 shares of $10 par common stock for $22 per share.

6. Acquired additional office equipment by issuing a note payable for $8,000.

Chapter 23, Problem 12SPB, EXPANDED STATEMENT OF CASH FLOWS Financial statements for McGinnis Company as well as additional , example  5

REQUIRED

Prepare a statement of cash flows explaining the change in cash and cash equivalents for the year ended December 31, 20-2.

Expert Solution & Answer
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To determine

Prepare a statement of cash flows explaining the change in cash and cash equivalents for the year ended December 31, 20-2.

Explanation of Solution

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.

Indirect method: Under indirect method, net income is reported first, and then non-cash expenses, losses from fixed assets, and changes in opening balances and ending balances of current assets and current liabilities are adjusted to reconcile the net income balance.

Cash flows from operating activities: Operating activities refer to the normal activities of a company to carry out the business.

The below table shows the way of calculation of cash flows from operating activities:

Cash flows from operating activities (Indirect method)
Net income:
 
Add: Decrease in current assets
         Increase in current liability
         Depreciation expense and amortization expense
         Loss on sale of plant assets
 
Deduct: Increase in current assets
              Decrease in current liabilities
              Gain on sale of plant assets
Net cash provided from or used by operating activities

Table (1)

Cash flows from investing activities: Investing activities refer to the activities carried out by a company for acquisition of long term assets.  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 collection of loan made to borrowers
         Sale of marketable securities / investments
         Sale of property, plant and equipment
         Proceeds from discounting notes receivables
 
Deduct: Purchase of fixed assets/long-lived assets
              Loan made by the company to others
              Purchase of marketable securities
Net cash provided from or used by investing activities

Table (2)

Cash flows from financing activities: Financing activities refer to the activities carried out by a company to mobilize funds to carry out the business activities.  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 by signing of a mortgage
          Proceeds from sale of treasury stock
          Proceeds from issuance of debt
 
Deduct: Payment of dividend
              Repayment of debt
              Repayment of the principal on loan
              Redemption of debt
              Purchase of treasury stock
Net cash provided from or used by financing activities

Table (3)

Prepare a statement of cash flows explaining the change in cash and cash equivalents for the year ended December 31, 20-2.

College Accounting, Chapters 1-27 (New in Accounting from Heintz and Parry), Chapter 23, Problem 12SPB , additional homework tip  1

College Accounting, Chapters 1-27 (New in Accounting from Heintz and Parry), Chapter 23, Problem 12SPB , additional homework tip  2

Table (1)

Working notes:

Calculate the amount of cash and cash equivalents at January 1, 20-2:

Cash and cash equivalents at January 1, 20-2}=(Cash balance at January 1, 20-1 + Government notes )=($50,520+$16,000)=$66,520

Compute the amount of cash paid for interest in 20-2:

Step 1: Calculate the change in accrued interest payable.

Change in accrued interest payable}=(Accrued interest payable in 20-2Accrued interest payable in 20-1)=($900$1,200)=$300(Decrease)

Step 2: Calculate the amount of cash paid for interest in 20-2.

(Cash paid for interest expenses)=Interest expenses(+Decrease in accrued liabilitiesORIncrease in accrued liabilities)=(Interest expenses +Decrease in accrued interest payable)=$750+$300=$1,050

Compute the amount of cash paid for income taxes in 20-2:

Step 1: Calculate the change in income taxes payable.

Change in income taxes payable}=(Income taxes payable in 20-2Income taxes payable in 20-1)=($25,000$15,000)=$10,000(Increase)

Step 2: Calculate the amount of cash paid for income taxes in 20-2.

(Cash paid for income taxes)=Income tax expense(+Decrease in income taxes payableORIncrease in income taxes payable)=(Income tax expense Increase in  interest payable)=$95,000$10,000=$85,000

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Chapter 23 Solutions

College Accounting, Chapters 1-27 (New in Accounting from Heintz and Parry)

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