a.
Statement of cash flows: It is one of the financial statement that shows the cash and cash equivalents of a company for a particular period. It determines the net changes in cash through reporting the sources and uses of cash due to the operating, investing, and financing activities of a company.
Indirect method: Under this method, the following amounts are to be adjusted from the Net Income to calculate the net cash provided from operating activities.
Cash flows from operating activities: These are the cash produced by the normal business operations.
The below table shows the way of calculation of cash flows from operating activities:
Cash flows from operating activities (Indirect method) |
Add: Decrease in current assets |
Increase in current liability |
|
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: Cash provided by or used in investing activities is a section of statement of cash flows. 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 sale of fixed assets |
Sale of marketable securities / investments |
Interest received |
Dividend received |
Deduct: Purchase of fixed assets/long-lived assets |
Purchase of marketable securities |
Net cash provided from or used by investing activities |
Table (2)
Cash flows from financing activities: Cash provided by or used in financing activities is a section of statement of cash flows. 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 |
Proceeds from issuance of debt |
Issuance of bonds payable |
Deduct: Payment of dividend |
Repayment of debt |
Interest paid |
Redemption of debt |
Repurchase of stock |
Net cash provided from or used by financing activities |
Table (3)
To Prepare: A statement of cash flows under indirect method.
a.
Answer to Problem 16.17EX
O Industries | ||
Statement of Cash Flows - Indirect Method | ||
Details | Amount ($) | Amount ($) |
Cash flows from operating activities: | ||
Net income | 62 | |
Adjustments to reconcile net income to net cash flow from operating activities: | ||
Depreciation expense | 26 | |
Gain on sale of land | (40) | |
Changes in current operating assets and liabilities: | ||
Increase in accounts receivable | (6) | |
Increase in inventory | (18) | |
Increase in accounts payable | 14 | (24) |
Net cash provided by operating activities | $38 | |
Cash flows from investing activities: | ||
Cash from sale of land | 120 | |
Cash used for purchase of equipment | (30) | |
Net cash provided by investing activities | $90 | |
Cash flows from financing activities: | ||
Cash from sale of common stock | 60 | |
Cash used for dividends | (19) | |
Net cash provided by financing activities | $41 | |
Increase (decrease) in cash | $169 | |
Cash at the beginning of the year | 14 | |
Cash at the end of the year | $183 |
Table (4)
Explanation of Solution
Working note:
Prepare the schedule in the changes of current assets and liabilities.
Schedule in the Change of Current Assets and Liabilities | ||||
Details | Amount ($) | Effect on Operating Activities | ||
Beginning Balance | Ending Balance |
Increase/ (Decrease) | ||
Accounts receivable | 49 | 55 | 6 | Deduct |
Inventories | 99 | 117 | 18 | Deduct |
Accounts payable | 37 | 51 | 14 | Add |
Table (3)
Calculate the amount of depreciation expense:
Calculate the amount gain on sale of land:
Calculate the amount of cash used to purchase of equipment:
Calculate the amount of cash from common stock:
Calculate the amount of dividends:
Therefore, the ending cash balance is $183.
b.
To Explain: The cash flow from operations more or less than net income
b.
Explanation of Solution
- Depreciation expense amount of $26 does not show any effect on cash flow from operating activities.
- The gain on sale of land of $40 will be reported in operating activities. The proceeds from sale of $120 will be reported in the investing activities section of the statement of cash flows.
- Moreover, the changes in current operating assets and liabilities are added or deducted based on the effect of below cash flows:
Increase in accounts receivable $6 (Deducted).
Increase in inventories $18 (Deducted).
Increase in accounts payable $14 (Added).
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Chapter 16 Solutions
Accounting
- Listed below are items reported on the financial statements of the Huntington Company as of June 30: Cash flow provided by operating activities .. . Cash, beginning-of-year ................ . Cash, end-of-year ..................... . Inventory ............................ . Accounts receivable ................... . Cash flow from investing activities ........ . Other current assets ................... . Property, plant and equipment ........... . REQUIRED $21,000 9,000 16,000 5,500 12,200 (15,300) 1,500 40,000 Other long-term assets ............ $17,500 Cash flow from financing activities . . . 1,300 Current liabilities. . . . . . . . . . . . . . . . . 22,000 Long-term liabilities......... . ..... 18,250 Intangible assets. . . . . . . . . . . . . . . . . 9,500 Common stock ............ . ..... 51,000 Retained earnings . . . . . . . . . . . . . . . ? Prepare a classified balance sheet as of June 30 and statement of cash flows for the current year.arrow_forwardCompute cash flows from financing activities using the following company information. Cash received from short-term loan. . . . . . . . . . . $20,000 Cash dividends paid. . . . . . . . . . . . . . . . . . . $16,000 Purchase of short-term stock investments. . . . . . 5,000 Interest paid. . . . . . . . . . . . . . . . . . . . . . . . . 8,000arrow_forwardUse the following information for VPI Co. to prepare a statement of cash flows for the year ended December 31 using the indirect method. Cash balance at prior year-end. . . . . . . . . . . . . . $40,000 Gain on sale of machinery. . . . . . . . . . . . . . . . . . $ 2,000 P2 P3 Increase in inventory. . . . . . . . . . . . . . . . . . . . . . 5,000 Cash received from sale of machinery. . . . . . . . 9,500 Depreciation expense . . . . . . . . . . . . . . . . . . . . . 4,000 Increase in accounts payable. . . . . . . . . . . . . . . 1,500 Cash received from issuing stock. . . . . . . . . . . . 8,000 Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,000 Cash paid for dividends. . . . . . . . . . . . . . . . . . . . 1,000 Decrease in accounts receivable . . . . . . . . . . . . 3,000arrow_forward
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- Financial Accounting: The Impact on Decision Make...AccountingISBN:9781305654174Author:Gary A. Porter, Curtis L. NortonPublisher:Cengage Learning