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Identify and explain the major steps involved in preparing the statement of cash flows.

Short Answer

Expert verified
  • Determine the change in cash,
  • Estimation of net cash flow from operating activities,
  • Estimation of net cash flows from investing and financing activities.

Step by step solution

01

Meaning of Cash flow statement

The cash flow statement details changes in the company's cash and cash equivalents throughout an accounting period. This adjustment consolidates the interests in business, finance, and investment.

02

Major steps involved in preparing the statement of cash flows

There are three main phases involved in creating the statement of cash flows:

  1. Calculate the cash change: The difference between the starting and ending cash balances is discussed here.
  2. Calculate the operating activities' net cash flow: Analysing the income statement from the current year, comparative balance sheets, and particular transaction data are required.
  3. Calculate the cash flows from financing and investing operations : The impact on cash of all other adjustments to balance sheet accounts is examined.

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Most popular questions from this chapter

Question: Michaels Company had available at the end of 2017 the following information.

MICHAELS COMPANY COMPARATIVE

BALANCE SHEETS

AS OF DECEMBER 31, 2017 AND 2016


2017

2016

Cash

\(10,000

\)4,000

Accounts receivable

20,500

12,950

Short-term investments

22,000

30,000

Inventory

42,000

35,000

Prepaid rent

3,000

12,000

Prepaid insurance

2,100

900

Supplies

1,000

750

Land

125,000

175,000

Building

350,000

350,000

Accumulated depreciation โ€“ building

(105,000)

(87,500)

Equipment

525,000

400,000

Accumulated depreciation โ€“ equipment

(130,000)

(112,000)

Patents

45,000

50,000

Total assets

\(910,600

\)871,100

Account payable

\(22,000

\)32,000

Income tax payable

5,000

4,000

Salaries and wages payable

5,000

3,000

Short-term note payable

10,000

10,000

Long-term note payable

60,000

70,000

Bond payable

400,000

400,000

Premium on bond payable

20,303

25,853

Common stock

240,000

220,000

Paid-in-capital in excess of par โ€“ common stock

25,000

17,500

Retained earnings

123,297

88,747

Total liabilities and stockholders equity

\(910,600

\)871,100

MICHAELS COMPANY

INCOME STATEMENT AND DIVIDEND INFORMATION

FOR THE YEAR ENDED DECEMBER 31, 2017


Sales revenue

\(1,160,000

Cost of goods sold

748,000

Gross margin

412,000

Operating expenses

Selling expenses

\)79,200

Administrative expenses

156,700

Depreciation/Amortization expenses

40,500

Total operating expenses

276,400

Income from operations

135,600

Other revenue/expenses

Gain on sale of land

8,000

Gain on sale of short-term investment

4,000

Dividend revenue

2,400

Interest expenses

(51,750)

(37,350)

Income before tax

98,250

Income tax expenses

39,400

Net income

58,850

Dividend to common stockholders

(24,300)

To Retained earnings

$34,550

Instructions

Prepare a statement of cash flows for Michaels Company using the direct method accompanied by a reconciliation schedule. Assume the short-term investments are debt securities, classified as available-for-sale


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 Ashleyโ€™s 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 Ashleyโ€™s 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 Ashleyโ€™s statement of cash flows for the fiscal year ended October 31, 2017.

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?

Novak Corporation is preparing its 2017 statement of cash flows, using the indirect method. Presented below is a list of items that may affect the statement. Using the code below, indicate how each item will affect Novakโ€™s 2017 statement of cash flows.

Code Letter Effect

A Added to net income in the operating section

D Deducted from net income in the operating section

R-I Cash receipt in investing section

P-I Cash payment in investing section

R-F Cash receipt in financing section

P-F Cash payment in financing section

N Noncash investing and financing activity

(a)Purchase of land and building

(b)Decrease in accounts receivable

(c)Issuance of stock.

(d)Depreciation expense.

(e)Sale of land at book value.

(f)Sale of land at a gain.

(g)Payment of dividends.

(h)Increase in accounts receivable.

(i)Purchase of available-for-sale debt investment

(j)Increase in accounts payable.

(k)Decrease in accounts payable.

(l)Loan from bank by signing note

(m)Purchase of equipment using a note

(n)Increase in inventory

(o)Issuance of bonds.

(p)Redemption of bonds payable.

(q)Sale of equipment at a loss.

(r)Purchase of treasury stock.

Question; In the case of a bank overdraft:

  1. GAAP typically includes the amount in cash and cash equivalents.
  2. IFRS typically includes the amount in cash equivalents but not in cash.
  3. GAAP typically treats the overdraft as a liability, and reports the amount in the financing section of the statement of cash flows.
  4. IFRS typically treats the overdraft as a liability, and reports the amount in the investing section of the statement of cash flows.
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