Chapter 16, Problem 11E

1.

To determine

Prepare a statement of cash flows of Incorporation I for the year ended June 30, 2019 using indirect method.

Explanation of Solution

Statement of cash flows: Statement of cash flow is a financial statement that shows the cash and cash equivalents of a company for a particular period of time. It shows the net changes in cash, by reporting the sources and uses of cash as a result of operating, investing, and financing activities of a company.

Indirect method: Under indirect method, net income is reported first, and then non-cash expenses, losses from fixed assets, and changes in opening balances and ending balances of current assets are adjusted to reconcile the net income balance.

Prepare a statement of cash flows of Incorporation I for the year ended June 30, 2019 under indirect method.

Incorporation I
Statement of cash flows – Indirect method
For the year ended June 30, 2019
Particulars	Amount	Amount
Cash flow from operating activities:
Net Income	$99,510
Adjustment to reconcile net income to net cash provided by operating activities:
Income statement items not affecting cash:
Add: Depreciation expense	$58,600
Less: Gain on sale of equipment	($2,000)
Changes in current assets and liabilities (Refer Table (2))
Add: Decrease in inventory	$22,700
Add: Decrease in prepaid expense	$1,000
Less: Increase in accounts receivable	($14,000)
Less: Decrease in accounts payable	($5,000)
Less: Decrease in wages payable	($9,000)
Less: Decrease in income taxes payable	($400)
Net cash provided by operating activities		$151,410
Cash flow from investing activities:
Cash proceeds from sale of equipment (Refer Table (3))	$10,000
Less: Cash paid for acquiring new equipment (2)	($57,600)
Net cash used in investing activities		($47,600)
Cash flow from financing activities:
Issuance of common stock	$60,000
Less: Cash paid for retired notes (3)	($30,000)
Less: Payments of cash dividends  (4)	($90,310)
Net cash used in financing activities		($60,310)
Net increase in cash		$43,500
Cash balance at the beginning		$44,000
Cash balance at the end		$87,500

Table (1)

Working Note:

1. Determine the changes in current assets and Liabilities.

Schedule in the changes of assets and liabilities
Particulars	Amount
	Current year  (June 30, 2019)	Previous year (June 30, 2018)	Increase/(Decrease)
Accounts receivable	$65,000	$51,000	$14,000
Inventory	$63,800	$86,500	($22,700)
Prepaid expenses	$4,400	$5,400	($1,000)
Accounts payable	$25,000	$30,000	($5,000)
Wages payable	$6,000	$15,000	($9,000)
Income taxes payable	$3,400	$3,800	($400)

Table (2)

2. Determine the cash proceeds from the sale of equipment.

Compute the accumulated depreciation for the equipment sold.

…… (1)

Now, determine the cash proceeds from the sale of equipment.

Cash proceeds from the sale of equipment
Cost of equipment sold	$48,600
Less: Accumulated depreciation of equipment sold (1)	($40,600)
Book value of equipment sold	$8,000
Add: Gain on sale of equipment (Given)	$2,000
Cash proceeds from sale of equipment	$10,000

Table (3)

3. Determine the cash paid for acquiring new equipment.

…… (2)

4. Determine the cash paid for retired notes

…… (3)

5. Determine the cash dividends paid during the year.

…… (4)

2.

To determine

Compute the cash flow to total assets ratio of Incorporation I for its fiscal year 2019.

Explanation of Solution

Cash flow to total assets ratio: Cash flow to total assets ratio is used to measure the actual cash inflows with respect to the assets of the company without being affected by income recognitions and measurements. This ratio is calculated by using the formula given below:

$\text{Cash flow to total assets}=\frac{\text{Operating cash flows}}{\text{Average total assets}}$

Compute the cash flow to total assets ratio of Incorporation I for its fiscal year 2019.

Ratios	2019
Beginning total assets June 30, 2018 (A)	$292,900
Ending total assets June 30, 2019 (B)	$317,700
Average total assets (C) $\left(\left(\text{A}+\text{B}\right)÷2\right)$	$305,300
Operating cash flows (D)	$151,410
Cash flow to total assets $\left(\text{C}\right)+\left(\text{D}\right)$	49.6%

Table (4)

Conclusion

Therefore, the cash flow to total assets ratio of Incorporation I for its fiscal year 2019 is 49.6%.