Concept explainers
The following balance sheets and income statement were taken from the records of Rosie-Lee Company:
Additional transactions were as follows:
- a. Sold equipment costing $21,600, with
accumulated depreciation of $16,200, for $3,600. - b. Issued bonds for $90,000 on December 31.
- c. Paid cash dividends of $36,000.
- d. Retired mortgage of $108,000 on December 31.
Required:
- 1. Prepare a schedule of operating
cash flows using (a) the indirect method and (b) the direct method. - 2. Prepare a statement of cash flows using the indirect method.
1.
(a).
Construct a schedule showing the operating cash flows with the use of indirect method.
Explanation of Solution
Cash Flows from Operating Activities:
This category of a cash flow statement shows the operational and profit generating activities in a firm. The operating cash flows increase or decrease the current assets and current liabilities of a firm.
The schedule showing operating cash flows using indirect method is in the table below:
R-L Company | |
Schedule for Cash Flow from Operating Activities | |
For the year ended June 30, 20X2 | |
Particulars | Amount ($) |
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:
2.
Calculation of difference in accounts payable:
3.
The total depreciation expense is $19,800
1.
(b).
Construct a schedule showing the operating cash flows with the use of direct method.
Explanation of Solution
The schedule showing operating cash flows using direct method is in the table below:
Schedule for Operating Cash Flows | |||
R-L Company | |||
For the year ended June 30, 20X2 | |||
Direct Method | |||
Particulars | Income statement ($) | 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:
2.
Calculation of difference in accounts payable:
3.
The total depreciation expense is $19,800
2.
Construct the statement of cash flows with the use of indirect method.
Explanation of Solution
Cash Flow Statement:
Cash flow statement is a financial statement prepared to provide information about the sources and uses of cash in a firm. In this statement, the activities increasing cash are referred as cash inflows and the activities that decrease cash are referred as cash outflows.
The statement of cash flows for R-L Company for 20X2 using indirect method is shown below:
R-L Company | ||
Statement of Cash Flows | ||
For the year ended June 30, 20X2 | ||
Particulars | Amount ($) | 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:
2.
Calculation of difference in accounts payable:
3.
The total depreciation expense is $19,800
4.
Calculation of purchase value of equipment:
5.
Calculation of purchase value of land:
6.
Calculation of issuance value of common stock:
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