Chapter 23: Q5Q (page 1371)
Identify and explain the major steps involved in preparing the statement of cash flows.
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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 – building | (105,000) | (87,500) |
Equipment | 525,000 | 400,000 |
Accumulated depreciation – 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 – 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 Ashley’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 Ashley’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 Ashley’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 Novak’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:
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