Chapter 14, Problem 50P

The following balance sheets and income statement were taken from the records of Rosie-Lee Company:

Additional transactions were as follows:

1. a. Sold equipment costing $21,600, with accumulated depreciation of $16,200, for $3,600.
2. b. Issued bonds for $90,000 on December 31.
3. c. Paid cash dividends of $36,000.
4. d. Retired mortgage of $108,000 on December 31.

Required:

1. 1. Prepare a schedule of operating cash flows using (a) the indirect method and (b) the direct method.
2. 2. Prepare a statement of cash flows using the indirect method.

To determine

Construct a schedule showing the operating cash flows with the use of indirect method.

Explanation of Solution

Cash Flows from Operating Activities:

This category of a cash flow statement shows the operational and profit generating activities in a firm. The operating cash flows increase or decrease the current assets and current liabilities of a firm.

The schedule showing operating cash flows using indirect method is in the table below:

R-L Company
Schedule for Cash Flow from Operating Activities
For the year ended June 30, 20X2
Particulars	Amount ($)
Cash flows from operating activities:
Net income	122,400
Add/ Less:
Increase in accounts receivable1	(18,000)
Increase in accounts payable2	18,000
Depreciation expense3	19,800
Loss on sale of equipment	1,800
Net cash from operating activities	144,000

Table (1)

Therefore, net cash flow from operating activities is $144,000.

Working Note:

1.

Calculation of difference in accounts receivable:

$\begin{array}{c}\left(\begin{array}{l}\text{Difference}\text{in}\\ \text{Accounts}\text{Receivable}\end{array}\right)=\left(\begin{array}{l}\text{Amount}\text{of}\text{Accounts}\text{Receivable}\text{of}20\text{X}2\\ -\text{Amount}\text{of}\text{Accounts}\text{Receivable}\text{of}20\text{X1}\end{array}\right)\\ =\left(\$144,000-\$126,000\right)\\ =\$18,000\end{array}$

2.

Calculation of difference in accounts payable:

$\begin{array}{c}\left(\begin{array}{l}\text{Difference}\text{in}\\ \text{Accounts}\text{Payable}\end{array}\right)=\left(\begin{array}{l}\text{Amount}\text{of}\text{Accounts}\text{Payable}\text{of}20\text{X}2\\ -\text{Amount}\text{of}\text{Accounts}\text{Payable}\text{of}20\text{X1}\end{array}\right)\\ =\left(\$90,000-\$72,000\right)\\ =\$18,000\end{array}$

3.

The total depreciation expense is $19,800$\left(\$16,200+\$3,600\right)$.

To determine

Construct a schedule showing the operating cash flows with the use of direct method.

Explanation of Solution

The schedule showing operating cash flows using direct method is in the table below:

Schedule for Operating Cash Flows
R-L Company
For the year ended June 30, 20X2
Direct Method
Particulars	Income statement ($)	Adjustments ($)	Cash flows ($)
Cash flows from operating activities:
Revenues	920,000	(18,000)1	902,000
Cost of goods sold	(620,000)	18,0002	(602,000)
Operating expenses	(177,600)	19,8003
		1,800	(156,000)
Net cash from operating activities			144,000

Table (2)

Therefore, net cash flow from operating activities is $144,000.

Working Note:

1.

Calculation of difference in accounts receivable:

$\begin{array}{c}\left(\begin{array}{l}\text{Difference}\text{in}\\ \text{Accounts}\text{Receivable}\end{array}\right)=\left(\begin{array}{l}\text{Amount}\text{of}\text{Accounts}\text{Receivable}\text{of}20\text{X}2\\ -\text{Amount}\text{of}\text{Accounts}\text{Receivable}\text{of}20\text{X1}\end{array}\right)\\ =\left(\$144,000-\$126,000\right)\\ =\$18,000\end{array}$

2.

Calculation of difference in accounts payable:

$\begin{array}{c}\left(\begin{array}{l}\text{Difference}\text{in}\\ \text{Accounts}\text{Payable}\end{array}\right)=\left(\begin{array}{l}\text{Amount}\text{of}\text{Accounts}\text{Payable}\text{of}20\text{X}2\\ -\text{Amount}\text{of}\text{Accounts}\text{Payable}\text{of}20\text{X1}\end{array}\right)\\ =\left(\$90,000-\$72,000\right)\\ =\$18,000\end{array}$

3.

The total depreciation expense is $19,800$\left(\$16,200+\$3,600\right)$.

To determine

Construct the statement of cash flows with the use of indirect method.

Explanation of Solution

Cash Flow Statement:

Cash flow statement is a financial statement prepared to provide information about the sources and uses of cash in a firm. In this statement, the activities increasing cash are referred as cash inflows and the activities that decrease cash are referred as cash outflows.

The statement of cash flows for R-L Company for 20X2 using indirect method is shown below:

R-L Company
Statement of Cash Flows
For the year ended June 30, 20X2
Particulars	Amount ($)	Amount ($)
Cash flows from operating activities:
Net income	122,400
Add/ Less:
Increase in accounts receivable1	(18,000)
Increase in accounts payable2	18,000
Depreciation expense3	19,800
Loss on sale of equipment	1,800
Net cash from operating activities		144,000
Cash flows from investing activities:
Sale of equipment	3,600
Purchase of investments	(54,000)
Purchase of equipment4	(30,600)
Purchase of land5	(18,000)
Net cash from investing activities		(99,000)
Cash flows from financing activities:
Retirement of mortgage	(108,000)
Issuance of bonds	90,000
Retirement of preferred stock	(36,000)
Payment of dividends	(36,000)
Issuance of common stock6	108,000
Net cash from financing activities		18,000
Net increase in cash		63,000

Table (3)

Therefore, there is a net increase in cash of $63,000.

Working Note:

1.

Calculation of difference in accounts receivable:

$\begin{array}{c}\left(\begin{array}{l}\text{Difference}\text{in}\\ \text{Accounts}\text{Receivable}\end{array}\right)=\left(\begin{array}{l}\text{Amount}\text{of}\text{Accounts}\text{Receivable}\text{of}20\text{X}2\\ -\text{Amount}\text{of}\text{Accounts}\text{Receivable}\text{of}20\text{X1}\end{array}\right)\\ =\left(\$144,000-\$126,000\right)\\ =\$18,000\end{array}$

2.

Calculation of difference in accounts payable:

$\begin{array}{c}\left(\begin{array}{l}\text{Difference}\text{in}\\ \text{Accounts}\text{Payable}\end{array}\right)=\left(\begin{array}{l}\text{Amount}\text{of}\text{Accounts}\text{Payable}\text{of}20\text{X}2\\ -\text{Amount}\text{of}\text{Accounts}\text{Payable}\text{of}20\text{X1}\end{array}\right)\\ =\left(\$90,000-\$72,000\right)\\ =\$18,000\end{array}$

3.

The total depreciation expense is $19,800$\left(\$16,200+\$3,600\right)$.

4.

Calculation of purchase value of equipment:

$\begin{array}{c}PurchaseValueofEquipment=\left(\begin{array}{l}EndingValueofEquipment\\ -BeginningValueofEquipment\\ +SalesValue\end{array}\right)\\ =\left(\$189,000-\$180,000+\$21,600\right)\\ =\$30,600\end{array}$

5.

Calculation of purchase value of land:

$\begin{array}{c}PurchaseValueofLand=\left(\begin{array}{l}Valueof\text{Land}\text{in}\text{20X2}\\ -Valueof\text{Land}\text{in}\text{20X1}\end{array}\right)\\ =\left(\$54,000-\$36,000\right)\\ =\$18,000\end{array}$

6.

Calculation of issuance value of common stock:

$\begin{array}{c}\text{Issuance}Valueof\text{Common}\text{Stock}=\left(\begin{array}{l}Valueof\text{Common}\text{Stock}\text{in}\text{20X2}\\ -Valueof\text{Common}\text{Stock}\text{in}\text{20X1}\end{array}\right)\\ =\left(\$288,000-\$180,000\right)\\ =\$108,000\end{array}$