Chapter 14: Q14-5RQ (page 768)
Question: Describe the two formats for reporting operating activities on the statement of cash flows.
Answer
The two formats for reporting operating activities on the statement of cash flows are:
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Moss Exports is having a bad year. Net income is only \(60,000. Also, two important overseas customers are falling behind in their payments to Moss, and Moss’s accounts receivable are ballooning. The company desperately needs a loan. The Moss Exports Board of Directors is considering ways to put the best face on the company’s financial statements. Moss’s bank closely examines cash flow from operating activities. Daniel Peavey, Moss’s controller, suggests reclassifying the receivables from the slow-paying clients as long-term. He explains to the board that removing the \)80,000 increase in accounts receivable from current assets will increase net cash provided by operations. This approach may help Moss get the loan.
Requirements
Preparing the statement of cash flows—indirect method, evaluating cash flows, and measuring free cash flows
The comparative balance sheet of Robeson Educational Supply at December 31, 2018, reported the following:
2018 2017 Current Assets: Cash \( 83,900 \) 20,500 Accounts Receivable 14,500 21,800 Merchandise Inventory 61,800 60,400 Current Liabilities: Accounts Payable 29,600 28,100 Accrued Liabilities 10,500 11,900 Robeson’s transactions during 2018 included the following:
Payment of cash dividends \( 21,200
Depreciation expense \) 17,400
Purchase of equipment with cash 54,400
Purchase of building with cash 103,000
Issuance of long-term notes payable to borrow cash 44,000
Net income 63,600
Issuance of common stock for cash 111,000
Requirements
1. Prepare the statement of cash flows of Robeson Educational Supply for the year ended December 31, 2018. Use the indirect method to report cash flows from operating activities.
2. Evaluate Robeson’s cash flows for the year. Mention all three categories of cash flows, and give the reason for your evaluation.
3. If Robeson plans similar activity for 2018, what is its expected free cash flow?
Preparing the statement of cash flows—direct method
Diversion Rare Coins (DRC) was formed on January 1, 2018. Additional data for the year follow:
a. On January 1, 2018, DRC issued no par common stock for \(450,000.
b. Early in January, DRC made the following cash payments:
1. For store fixtures, \)46,000
2. For merchandise inventory, \(310,000
3. For rent expense on a store building, \)18,000
c. Later in the year, DRC purchased merchandise inventory on account for \(238,000. Before year-end, DRC paid \)138,000 of this accounts payable.
d. During 2018, DRC sold 2,700 units of merchandise inventory for \(400 each. Before year-end, the company collected 85% of this amount. Cost of goods sold for the year was \)340,000, and ending merchandise inventory totaled \(208,000.
e. The store employs three people. The combined annual payroll is \)97,000, of which DRC still owes \(6,000 at year-end.
f. At the end of the year, DRC paid income tax of \)18,000. There was no income taxes payable.
g. Late in 2018, DRC paid cash dividends of $35,000.
h. For store fixtures, DRC uses the straight-line depreciation method, over five years, with zero residual value.
Requirements
1. Prepare DRC’s income statement for the year ended December 31, 2018. Use the single-step format, with all revenues listed together and all expenses listed together.
2. Prepare DRC’s balance sheet at December 31, 2018.
3. Prepare DRC’s statement of cash flows for the year ended December 31, 2018. Format cash flows from operating activities by the direct method
Question: Describing the purposes of the statement of cash flows Financial statements all have a goal.
The statement of cash flows does as well. Describe how the statement of cash flows helps investors and creditors perform each of the following functions:
a. Predict future cash flows.
b. Evaluate management decisions.
c. Predict the ability to make debt payments to lenders and pay dividends to stockholders.
Preparing the direct method statement of cash flows Use the data in Short Exercise S14A-12 and your results. Prepare the business’s complete statement of cash flows for the year ended June 30, 2018, using the direct method for operating activities.
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