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Chapter 14: 44PGB (page 793)

Preparing the statement of cash flows鈥攊ndirect method with non-cash transactions the 2018 income statement and comparative balance sheet of Sweet Valley, Inc. follow:

Additionally, Sweet Valley purchased land of \(20,900 by financing it 100% with long-term notes payable during 2018. During the year, there were no sales of land, no retirements of stock, and no treasury stock transactions. A plant asset was disposed of for \)0. The cost and the accumulated depreciation of the disposed asset were $13,240. Plant asset was acquired for cash.

Requirements

1. Prepare the 2018 statement of cash flows, formatting operating activities by the indirect method.

2. How will what you learned in this problem help you evaluate an investment?

Short Answer

Expert verified
  1. Net cash from operating activities is $136,300.
  2. Cash flow statement indicating that company has enough liquidity to run business efficiently.

Step by step solution

01

Statement of cash flows using the indirect method

SWEET VALLEY, INC.

Statement of Cash Flows

For the year ended December 31, 2018

Cash Flows From Operating Activities:

Net Income

$107,500

Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:

Add: Depreciation expense

$14,500

Less: Increase in account receivables

($1,300)

Add: Decrease in merchandise inventory

$12,000

Add: Increase in account payable

$5,500

Less:Decrease in accrued liabilities

($1,900)

Net cash provided/ (used) in operating activities

$136,300

Cash Flows From Investing Activities:

Purchase of plant

($20,700)

Net cash provided/ (used) in investing activities

($20,700)

Cash Flows From Financing Activities:

Issuance of common stock

$23,400

Less: Payment of notes payable

($47,900)

Less: Dividend paid

($80,200)

Net cash provided/ (used) in financing activities

($83,800)

Net increase/(Decrease) in cash

$10,900

Cash Balance, December 31, 2017

$15,400

Cash Balance, December 31, 2018

$26,300

02

Calculation of value of plant purchase:

The value of the purchase of the plant is determined by taking the opening balance i.e., $108,330 and subtracting the cost of the sold plant i.e., $13,240 then comparing it to the closing balance of the plant i.e., $115,790. Therefore, the difference now will be the purchase of the plant i.e., $20,700.

03

Evaluation of investment (2):

This problem help in evaluating an investment because it providing information about the cash receipts and cash payments. This indicating that company has enough liquidity to pay their debts

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Most popular questions from this chapter

A-One Mobile Homes reported the following in its financial statements for the year Ended December 31, 2018:

2018 2017

Income Statement

Net Sales Revenue \( 25,118 \) 21,893

Cost of Goods Sold 18,074 15,501

Depreciation Expense 271 234

Other Operating Expenses 4,632 4,277

Income Tax Expense 530 482

Net Income \( 1,611 \) 1,399

Balance Sheet

Cash \( 21 \) 19

Accounts Receivable 798 615

Merchandise Inventory 3,483 2,832

Property, Plant, and Equipment, net 4,351 3,437

Accounts Payable 1,547 1,364

Accrued Liabilities 938 851

Long-term Liabilities 477 461

Common Stock, no par 670 443

Retained Earnings 5,021 3,784

Requirements

1. Compute the collections from customers.

2. Compute payments for merchandise inventory.

3. Compute payments of other operating expenses.

4. Compute the acquisitions of property, plant, and equipment (no sales of property during 2018).

5. Compute the amount of borrowing, with A-One paying no long-term liabilities.

6. Compute the cash receipt from issuance of common stock.

7. Compute the payment of cash dividends.

Preparing operating activities using the direct method Amy鈥檚 Learning Center has assembled the following data for the year ended June 30, 2018:

Payments to suppliers $ 115,000

Cash payment for purchase of equipment 39,000

Payments to employees 66,000

Payment of notes payable 34,000

Payment of dividends 7,500

Cash receipt from issuance of stock 22,000

Collections from customers 188,000

Cash receipt from sale of land 58,000

Cash balance, June 30, 2017 41,000 Prepare the operating activities section of the business鈥檚 statement of cash flows for the year ended June 30, 2018, using the direct method.

Using a spreadsheet to complete the statement of cash flows鈥� indirect method

Companies can use a spreadsheet to complete the statement of cash flows. Each item that follows is recorded in the transaction analysis columns of the spreadsheet.

  1. Net income
  2. Increases in current assets (other than Cash)
  3. Decreases in current liabilities
  4. Cash payment for acquisition of plant assets
  5. Cash receipt from issuance of common stock
  6. Depreciation expense

Identify each as being recorded by a Debit or Credit in the statement of cash flows section of the spreadsheet

Question: If a company experienced a loss on disposal of long-term assets, how would this be reported in the operating activities section of the statement of cash flows when using the indirect method? Why?

Computing operating activities cash flow鈥攊ndirect method

The accounting records of CD Sales, Inc. include the following accounts: Account Beginning Balance Ending Balance Cash \( 7,500 \) 6,500 Accounts Receivable 21,000 17,500 Merchandise Inventory 20,000 30,000 Accounts Payable 15,000 19,000 Accumulated Depreciation鈥� Equipment

2,000 Depr. Exp.

56,000 Jul. 1

58,000 Jul. 31

Retained Earnings

Dividends 15,000

63,000 Jul. 1

50,000 Net Inc.

98,000 Jul. 31

Compute CD鈥檚 net cash provided by (used for) operating activities during July 2018. Use the indirect method.
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