Ch 16 The Statement of Cash Flows

SolutionsP16-33A Preparing the statement of cash flows—indirect methodLearning Objective 2Net Cash Used for Inv. Act. $(16,000)

Accountants for Smithson, Inc. have assembled the following data for the year ended December 31, 2016:

Prepare Smithson’s statement of cash flows using the indirect method. Include an accompanying schedule of non-cash investing and financing activities.

SOLUTION

ACCOUNTANTS FOR SMITHSON, INC.Statement of Cash Flows

Year Ended December 31, 2016

Cash Flows from Operating Activities: Net Income $ 69,500 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:

Depreciation Expense $ 25,000Gain on Sale of Building (4,000)Decrease in Accounts Receivable 6,000Increase in Merchandise Inventory (5,000)Increase in Accounts Payable 1,900Decrease in Income Tax Payable (2,600) 21,300

Net Cash Provided by Operating Activities 90,800Cash Flows from Investing Activities: Acquisition of Equipment for Cash (73,000) Cash Receipt from Sale of Building 57,000Net Cash Used for Investing Activities (16,000)Cash Flows from Financing Activities: Cash Receipt from Issuance of Common Stock 42,000 Cash Receipt from Issuance of Notes Payable 60,000 Cash Payment of Notes Payable (42,100)

Cash Payment of Dividends (52,000)Net Cash Provided by Financing Activities 7,900Net Increase (Decrease) in Cash 82,700Cash Balance, December 31, 2015 20,000Cash Balance, December 31, 2016 $ 102,700

Non-cash Investing and Financing Activities:Acquisition of Land by issuing Long-term Notes Payable $ 118,000Total Non-cash Investing and Financing Activities $ 118,000

P16-34A Preparing the statement of cash flows—indirect method with non-cash transactionsLearning Objective 21. Net Cash Prov. by Op. Act. $132,700

The 2016 income statement and comparative balance sheet of McKnight, Inc. follow:

Additionally, McKnight purchased land of $27,800 by financing it 100% with long-term notes payable during 2016. During the year, there were no sales of land, no retirements of stock, and no treasury stock transactions. A plant asset was disposed of for $0. The cost and the accumulated depreciation of the disposed asset was $10,200. The plant acquisition was for cash.

Requirements1. Prepare the 2016 statement of cash flows, formatting operating activities by the indirect

method.2. How will what you learned in this problem help you evaluate an investment?

SOLUTION

Requirement 1

MCKNIGHT, INC.Statement of Cash Flows

Year Ended December 31, 2016

Cash Flows from Operating Activities: Net Income $ 105,400 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:

Depreciation Expense—Plant Assets $ 14,200Increase in Accounts Receivable (1,500)Decrease in Merchandise Inventory 11,900Increase in Accounts Payable 4,600Decrease in Accrued Liabilities (1,900) 27,300

Net Cash Provided by Operating Activities 132,700Cash Flows from Investing Activities: Acquisition of Plant Asset for Cash (18,400)Net Cash Used for Investing Activities (18,400)Cash Flows from Financing Activities: Cash Receipt from Issuance of Common Stock 23,400 Cash Payment of Notes Payable (60,800)

Cash Payment of Dividends (65,600)Net Cash Used for Financing Activities (103,000)Net Increase (Decrease) in Cash 11,300Cash Balance, December 31, 2015 15,100Cash Balance, December 31, 2016 $ 26,400

Non-cash Investing and Financing Activities:Acquisition of Land by issuing Long-term Notes Payable $ 27,800Total Non-cash Investing and Financing Activities $ 27,800

P16-34ARequirement 1, cont.

Plant Assets12/31/2015 110,310Acquisitions 18,400

10,200 Disposed of12/31/2016 118,510

Accumulated Depreciation—Plant Assets15,610 12/31/201514,200 Depreciation Expense

Disposed of 10,20019,610 12/31/2016

Retained Earnings2,300 12/31/2015

105,400 Net IncomeDividend 65,600

42,100 12/31/2016

Notes Payable106,000 12/31/201527,800 Issuance

Payment 60,80073,000 12/31/2016

Requirement 2

I will be able to evaluate an investment with this information because I can see the cash receipts and cash payments for a specific period. This information can help me predict future cash flows, evaluate management decisions, and predict the ability of the company to pay their debts and dividends.

P16-35A Preparing the statement of cash flows—indirect method, evaluating cash flows, and measuring free cash flowsLearning Objectives 2, 31. Net Cash Used for Inv. Act. $(157,100)

The comparative balance sheet of Morston Educational Supply at December 31, 2016, reported the following:

Morston’s transactions during 2016 included the following:

Requirements1. Prepare the statement of cash flows of Morston Educational Supply for the year ended

December 31, 2016. Use the indirect method to report cash flows from operating activities.2. Evaluate Morston’s cash flows for the year. Mention all three categories of cash flows, and

give the reason for your evaluation.3. If Morston plans similar activity for 2017, what is its expected free cash flow?

SOLUTION

Requirement 1

MORSTON’S EDUCATIONAL SUPPLYStatement of Cash Flows

Year Ended December 31, 2016

Cash Flows from Operating Activities: Net Income $ 59,600 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:

Depreciation Expense—Plant Assets $ 17,000Decrease in Accounts Receivable 6,700Increase in Merchandise Inventory (3,600)Increase in Accounts Payable 1,000Decrease in Accrued Liabilities (500) 20,600

Net Cash Provided by Operating Activities 80,200Cash Flows from Investing Activities: Acquisition of Equipment for Cash (55,100) Acquisition of Building for Cash (102,000)Net Cash Used for Investing Activities (157,100)Cash Flows from Financing Activities: Cash Receipt from Issuance of Common Stock 114,000 Cash Receipt from Issuance of Notes Payable 47,000

Cash Payment of Dividends (20,200)Net Cash Provided by Financing Activities 140,800Net Increase (Decrease) in Cash 63,900Cash Balance, December 31, 2015 21,500Cash Balance, December 31, 2016 $ 85,400

Requirement 2

The company shows a strong cash flow. They are generating cash from their operations due primarily to net income. They are investing in Building and Equipment for their business and are financing it using the issuance of Common Stock and Notes Payable. The overall cash position increased over last year by $63,900.

Requirement 3

Net Cash provided by Operating Activities $ 80,200− Cash payments planned for Long-Term Assets (157,100)− Cash Dividends (20,200)

= Free Cash Flow $ (97,100)