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Chapter 23: Q7Q (page 1372)

Unlike the other major financial statements, the statement of cash flows is not prepared from the adjusted trial balance. From what sources does the information to prepare this statement come, and what information does each source provide?

Short Answer

Expert verified

Comparative balance sheets specify how equity, liabilities, and assets have evolved.

Income statement of current year indicates the cash generated by operations.

Specific transaction data indicates the cash provided or used during the period.

Step by step solution

01

Meaning of Statement of cash flow

The cash flow statement gives information on changes in a company's Cash Equivalents and Cash throughout an accounting period. This adjustment consolidates the interests in running, finance, and investing.

02

Explaining the sources and the information to prepare an income statement.

Information sources used to create the cash flow statement:

  • Comparative Balance Sheets
  • Current year income Statement
  • Information about specific deals

Comparative balance sheets clarify the changes in resources, liabilities, and value throughout a period. The current pay statement details how much money was generated by operating activities. It is conceivable to determine whether cash was conveyed or utilized during the period by looking at certain selected transactions, which reveal extensive additional information

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Most popular questions from this chapter

Question: . Classify the following items as (1) operating, (2) investing, (3) financing, or (4) significant noncash investing and financing activities, using the direct method.

(a) Cash payments to employees.

(b) Redemption of bonds payable.

(c) Sale of building at book value.

(d) Cash payments to suppliers.

(e) Exchange of equipment for furniture.

(f) Issuance of preferred stock.

(g) Cash received from customers.

(h) Purchase of treasury stock.

(i) Issuance of bonds for land.

(j) Payment of dividends.

(k) Purchase of equipment.

(l) Cash payments for operating expenses.

Comparative balance sheet accounts of Sharpe Company are presented below.

SHARPE COMPANY

COMPARATIVE BALANCE SHEET ACCOUNTS

AS OF DECEMBER 31

Debit Balances 2017 2016

Cash \( 70,000 \) 51,000

Accounts Receivable 155,000 130,000

Inventory 75,000 61,000

Debt investments (available-for-sale) 55,000 85,000

Equipment 70,000 48,000

Buildings 145,000 145,000

Land 40,000 25,000

Totals \(610,000 \)545,000

Credit Balances

Allowance for Doubtful Accounts \( 10,000 \) 8,000

Accumulated Depreciation鈥擡quipment 21,000 14,000

Accumulated Depreciation鈥擝uildings 37,000 28,000

Accounts Payable 66,000 60,000

Income Taxes Payable 12,000 10,000

Long-Term Notes Payable 62,000 70,000

Common Stock 310,000 260,000

Retained Earnings 92,000 95,000

Totals \(610,000 \)545,000

Additional data:

1. Equipment that cost \(10,000 and was 60% depreciated was sold in 2017.

2. Cash dividends were declared and paid during the year.

3. Common stock was issued in exchange for land.

4. Debt investments that cost \)35,000 were sold during the year.

5. There were no write-offs of uncollectible accounts during the year.

Sharpe鈥檚 2017 income statement is as follows.

Sales revenue \(950,000

Less: Cost of goods sold 600,000

Gross profit 350,000

Less: Operating expenses (includes depreciation expense and bad debt expense) 250,000

Income from operations 100,000

Other revenues and expenses Gain on sale of investments \)15,000

Loss on sale of equipment (3,000) 12,000

Income before taxes 112,000

Income taxes 45,000

Net income $ 67,000

Instructions

(a) Compute net cash provided by operating activities under the direct method.

(b) Prepare a statement of cash flows using the indirect method.

Question: (SCF鈥擠irect Method) Los Lobos Corp. uses the direct method to prepare its statement of cash flows. Los Lobos鈥檚 trial balances at December 31, 2017 and 2016, are as follows.

Debits
December 31

2017
2016

Cash

\(35,000

\)32,000

Accounts receivables

33,000

30,000

Inventory

31,000

47,000

Property, plant and equipment

100,000

95,000

Unamortized bond discount

4,500

5,000

Cost of goods sold

250,000

380,000

Selling expenses

141,500

172,000

General and administration expenses

137,000

151,300

Interest expenses

4,300

2,600

Income tax expenses

20,400

61,200

\(756,700

\)976,100

Credits
December 31

2017
2016

Allowance for doubtful accounts

\(1,300

\)1,100

Accumulated depreciation 鈥� Plant assets

16,500

15,000

Account payable

25,000

15,500

Income tax payable

21,000

29,100

Deferred tax liability

5,300

4,600

8% callable bonds payable

45,000

20,000

Common stock

50,000

40,000

Paid-in-capital in excess of par

9,100

7,500

Retained earnings

44,700

64,600

Sales revenue

538,800

778,700

\(756,700

\)976,100

Additional information:

1. Los Lobos purchased \(5,000 in equipment during 2017.

2. Los Lobos allocated one-third of its depreciation expense to selling expenses and the remainder to general and administrative expenses.

3. Bad debt expense for 2017 was \)5,000, and write-offs of uncollectible accounts totalled $4,800.

Instructions

Determine what amounts Los Lobos should report in its statement of cash flows for the year ended December 31, 2017, for the following items.

(a) Cash collected from customer

(d) Cash paid for income tax

(b) Cash paid to suppliers

(e) Cash paid for selling expenses

(c) Cash paid for interest

Question: (L01,4) (Classification of Transactions) Following are selected balance sheet accounts of Allman Bros. Corp. at December 31, 2017 and 2016, and the increases or decreases in each account from 2016 to 2017. Also presented is selected income statement information for the year ended December 31, 2017, and additional information.

2017

2016

Increase (Decrease)

Selected balance sheet accounts

Assets

Accounts receivables

\(34,000

\)24,000

\(10,000

Property, plant and equipment

277,000

247,000

30,000

Accumulated depreciation 鈥� plant assets

(178,000)

(167,000)

(11,000)

Liabilities and stockholder鈥檚 equity

Bonds payable

\)49,000

\(46,000

\)3,000

Dividend payable

8,000

5,000

3,000

Common stock, \(1 par

22,000

19,000

3,000

Additional paid-in-capital

9,000

3,000

6,000

Retained earnings

104,000

91,000

13,000

Selected income statement information for the year ended December 31, 2017:

Sales revenue

\)155,000

Depreciation

33,000

Gain on sale of equipment

14,500

Net income

31,000

Additional information:

1. During 2017, equipment costing \(45,000 was sold for cash.

2. Accounts receivable relate to sales of merchandise.

3. During 2017, \)20,000 of bonds payable were issued in exchange for property, plant, and equipment. There was no amortization of bond discount or premium.

Instructions

Determine the category (operating, investing, or financing) and the amount that should be reported in the statement of cash flows for the following items.

(a) Payments for purchase of property, plant, and equipment.

(b) Proceeds from the sale of equipment.

(c) Cash dividends paid.

(d) Redemption of bonds payable.


Question: (SCF Theory and Analysis of Transactions) Ashley Company is a young and growing producer of electronic measuring instruments and technical equipment. You have been retained by Ashley to advise it in the preparation of a statement of cash flows using the indirect method. For the fiscal year ended October 31, 2017, you have obtained the following information concerning certain events and transactions of Ashley.

1. The amount of reported earnings for the fiscal year was \(700,000, which included a deduction for a loss of \)110,000 (see item 5 below).

2. Depreciation expense of \(315,000 was included in the income statement.

3. Uncollectible accounts receivable of \)40,000 were written off against the allowance for doubtful accounts. Also, \(51,000 of bad debt expense was included in determining income for the fiscal year, and the same amount was added to the allowance for doubtful accounts.

4. A gain of \)6,000 was realized on the sale of a machine. It originally cost \(75,000, of which \)30,000 was undepreciated on the date of sale.

5. On April 1, 2017, lightning caused an uninsured building loss of \(110,000 (\)180,000 loss, less reduction in income taxes of \(70,000). This loss was included in determining income as indicated in item 1 above.

6. On July 3, 2017, building and land were purchased for \)700,000. Ashley gave in payment \(75,000 cash, \)200,000 market price of its unissued common stock, and signed a \(425,000 mortgage note payable.

7. On August 3, 2017, \)800,000 face value of Ashley鈥檚 10% convertible debentures was converted into $150,000 par value of its common stock. The bonds were originally issued at face value.

Instructions

Explain whether each of the seven numbered items above is a cash inflow or outflow, and explain how it should be disclosed in Ashley鈥檚 statement of cash flows for the fiscal year ended October 31, 2017. If any item is neither an inflow nor an outflow of cash, explain why it is not, and indicate the disclosure, if any, that should be made of the item in Ashley鈥檚 statement of cash flows for the fiscal year ended October 31, 2017.
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