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Chapter 14: Q15SE (page 774)

Using a spreadsheet to complete the statement of cash flows— 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

Short Answer

Expert verified
  1. Debit
  2. Credit
  3. Credit
  4. Credit
  5. Debit
  6. Debit

Step by step solution

01

Step-by-Step SolutionStep 1: Statement of cash flow using indirect method and spreadsheet

Organizations can use a spreadsheet to prepare cash flow statements using the indirect method. In the spreadsheet first balance sheet is prepared followed by the cash flow statement.

02

Identification of transaction as debit or credit

Particulars

Debit or Credit

Net Income

Debit

Increase in current assets (other than cash)

Credit

Decreases in current liabilities

Credit

Cash payment for acquisition of plant assets

Credit

Cash receipt from issuance of common stock

Debit

Depreciation Expense

Debit

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Most popular questions from this chapter

American Rare Coins (ARC) was formed on January 1, 2018. Additional data for the year follow:

a. On January 1, 2018, ARC issued no par common stock for \(450,000.

b. Early in January, ARC made the following cash payments:

  1. For store fixtures, \)53,000
  2. For merchandise inventory, \(340,000
  3. For rent expense on a store building, \)20,000

c. Later in the year, ARC purchased merchandise inventory on account for \(239,000. Before year-end, ARC paid \)139,000 of these accounts payable.

d. During 2018, ARC sold 2,400 units of merchandise inventory for \(275 each. Before year-end, the company collected 85% of this amount. Cost of goods sold for the year was \)250,000, and ending merchandise inventory totaled \(329,000.

e. The store employs three people. The combined annual payroll is \)96,000, of which ARC still owes \(3,000 at year-end.

f. At the end of the year, ARC paid income tax of \)17,000. There are no income taxes payable.

g. Late in 2018, ARC paid cash dividends of $44,000.

h. For store fixtures, ARC uses the straight-line depreciation method, over five years, with zero residual value.

Requirements

  1. What is the purpose of the statement of cash flows?
  2. Prepare ARC’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.
  3. Prepare ARC’s balance sheet at December 31, 2018.

Prepare ARC’s statement of cash flows using the indirect method for the year ended December 31, 2018.

Question: Classifying items on the indirect statement of cash flows

The statement of cash flows categorizes like transactions for optimal reporting. Identify each item as a(n):

• Operating activity—addition to net income (O+) or subtraction from net income (O-)

• Investing activity—cash inflow (I+) or cash outflow (I-)

• Financing activity—cash inflow (F+) or cash outflow (F-)

• Non-cash investing and financing activity (NIF)

• Activity that is not used to prepare the indirect statement of cash flows (N)

The indirect method is used to report cash flows from operating activities.

  1. Loss on sale of land.
  2. Acquisition of equipment by issuance of note payable.
  3. Payment of long-term debt.
  4. Acquisition of building by issuance of common stock.
  5. Increase in Salaries Payable.
  6. Decrease in Merchandise Inventory.
  7. Increase in Prepaid Expenses.
  8. Decrease in Accrued Liabilities.
  9. Cash sale of land (no gain or loss).
  10. Issuance of long-term note payable to borrow cash.
  11. Depreciation Expense.
  12. Purchase of treasury stock.
  13. Issuance of common stock.
  14. Increase in Accounts Payable.
  15. Net income.
  16. Payment of cash dividend

Preparing the direct method statement of cash flows Red Toy Company reported the following comparative balance sheet:

Requirements

1. Compute the collections from customers during 2018 for Red Toy Company. Sales Revenue totaled \(134,000.

2. Compute the payments for inventory during 2018. Cost of Goods Sold was \)79,000.

Question: Explain why depreciation expense, depletion expense, and amortization expense are added to net income in the operating activities section of the statement of cash flows when using the indirect method.

The comparative balance sheet of Jackson Educational Supply at December 31, 2018, reported the following:


20182017
Current

Assets:
Cash\( 87,700
\) 23,500
Accounts Receivable15,30022,000
Merchandise Inventory
62,600
60,400
Current

Liabilities:
Accounts Payable
28,100
26,100
Accrued Liabilities
10,600
11,300

Jackson’s transactions during 2018 included the following:

Payment of cash dividends \( 16,200

Depreciation expense \) 16,700

Purchase of equipment with cash 54,700

Purchase of building with cash 98,000

Issuance of long-term notes payable to borrow cash 48,000

Net income 57,600

Issuance of common stock for cash 105,000

Requirements

  1. Prepare the statement of cash flows of Jackson Educational Supply for the year ended December 31, 2018. Use the indirect method to report cash flows from operating activities.
  2. Evaluate Jackson’s cash flows for the year. Mention all three categories of cash flows, and give the reason for your evaluation.
  3. If Jackson plans similar activity for 2019, what is its expected free cash flow?
See all solutions

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