Chapter 4, Problem 4.10P

Integration of financial statements; Chapters 3 and 4

• LO4–8

The chief accountant for Grandview Corporation provides you with the company’s 2018 statement of cash flows and income statement. The accountant has asked for your help with some missing figures in the company’s comparative balance sheets. These financial statements are shown next ($ in millions).

Required:

1. Calculate the missing amounts.

2. Prepare the operating activities section of Grandview’s 2018 statement of cash flows using the indirect method.

To determine

Financial statement:

A financial statement is the complete record of financial transactions that take place in a company at a particular point of time. It provides important financial information regardingthe assets, liabilities, revenues and expenses of the company to its internal and external users. It helps them to know the exact financial position of the company.

To calculate: the missing amounts.

Explanation of Solution

Calculate the missing amounts.

Cash Balance – 2017:

$\begin{array}{c}\text{Cash Balance - 2018}=\text{ Cash Balance - 2017}+\text{Increase in Cash}\\ \text{Cash Balance - 2017}=\text{Cash Balance - 2018}-\text{Increase in Cash}\\ =\$145-\$86\\ \text{Cash Balance - 2017}=\$59\end{array}$

Accounts receivable-2018:

$\begin{array}{c}\text{Accounts Receivable - 2018}=\left[\begin{array}{l}\text{Accounts Receivable - 2017}\\ +\text{Credit Sales }-\text{ Cash Collections}\end{array}\right]\\ =\$84+\$80-\$71\\ =\$93\end{array}$

Inventory – 2018:

Calculate the purchase:

$\begin{array}{c}\left(\begin{array}{l}\text{Accounts payable-2017}+\text{Purchases}\\ -\text{Cash Paid}\end{array}\right)=\text{Account payable 2018}\\ \text{ Purchase}=\left(\begin{array}{l}\text{Account payable 2018}+\\ \text{Cash Paid}-\text{Accounts payable-2017}\end{array}\right)\\ =\$40+\$30-\$30\\ \text{ Purchases}=\$40\end{array}$

Calculate Inventory – 2017:

$\begin{array}{c}\text{Cost of Goods Sold}=\left[\left(\text{Inventory -2017}+\text{Purchases}\right)-\text{Inventory-2018}\right]\\ \text{Inventory - 2017}=\text{Cost of Goods Sold}+\text{Inventory-2018}-\text{Purchases}\\ =\$32+\$60-\$40\\ \text{Inventory -2017}=\$52\end{array}$

Accumulated Depreciation – 2017:

$\begin{array}{l}\text{Accumulated Depreciation - 2017}=\left(\begin{array}{l}\text{Accumulated Depreciation , 2018}\\ -\text{ Depreciation,2018}\end{array}\right)\\ \text{Accumulated Depreciation - 2017}=\$65-\$10\\ \text{Accumulated Depreciation - 2017}=\$55\end{array}$

Calculate total assets:

Total Assets	2018($)	2017($)
Cash	145	59
Accounts Receivable	93	84
Investments	-	50
Inventory	60	52
Property, plant, and equipment	150	150
Less: Accumulated Depreciation	(65)	(55)
Total Assets	$383	$340

Table (1)

Calculate Income tax payable – 2017

$\begin{array}{l}\text{Income Taxes Payable - 2017}=\left[\begin{array}{l}\left(\begin{array}{l}\text{Income Taxes Payable, 2018}\\ \text{+Income Taxes Paid}\end{array}\right)\\ -\text{ Income Tax Expense }\end{array}\right]\\ \text{Income Taxes Payable - 2017}=\text{\$22}+\text{\$9}-\$7\\ \text{Income Taxes Payable - 2017}=\$24\end{array}$

Calculate retained earnings -2018:

$\begin{array}{c}\text{Retained Earnings - 2018}=\left[\begin{array}{l}\left(\begin{array}{l}\text{Retained Earnings ,2017}\\ +\text{Net Income}\end{array}\right)\\ -\text{ Dividends}\end{array}\right]\\ =\$47+\$28-\$3\\ =\$72\end{array}$

Calculate total liabilities and shareholders’ equity:

Total Liabilities and Stockholder’s Equity	2018($)	2017($)
Accounts payable to suppliers	40	30
Payables for selling and administrative expenses	9	9
Income taxes payable	22	24
Common stock	240	230
Retained earnings	72	47
Total Assets	$383	$340

Table (2)

To determine

To prepare: Operating activities section of Corporation G’s cash flow statement using indirect method.

Explanation of Solution

Prepare the operating activities of Corporation G for 2018 statement of cash flows using indirect method.

Corporation G
Statement of Cash Flows - Indirect Method (Partial)
For the Year 2018
Particulars	Amount ($)	Amount ($)
Cash flows from Operating activities:
Net income		28
Adjustments for noncash effects:
Depreciation expense	10
Gain on sale of investments	(15)
Changes in operating assets and liabilities
Increase in accounts receivable(1)	(9)
Increase in inventory(2)	(8)
Increase in accounts payable(3)	10
Decrease in income taxes payable(4)	(2)	(14)
Net cash flows from operating activities		$14

Table (3)

Working notes:

Determine changes of assets and liabilities:

$\begin{array}{c}\text{Change inAccounts receivable=}\left[\begin{array}{l}\text{Accounts receiveable 2018}-\\ \text{Accounts receivable 2017}\end{array}\right]\\ \text{Change inAccounts receivable=\$93}-\text{84}\\ \text{=\$9}\end{array}$ (1)

$\begin{array}{c}\text{Change in Inventory=}\left[\begin{array}{l}\text{Inventory2018}-\\ \text{Inventory2017}\end{array}\right]\\ \text{Change inInevntory=\$60}-\text{\$52}\\ \text{=\$12}\end{array}$ (2)

$\begin{array}{c}\text{Change in Accountspayable=}\left[\begin{array}{l}\text{Accountspayable 2018}\\ -\text{Accountspayable 2017}\end{array}\right]\\ \text{Change in Accountspayable=\$40}-\text{\$30}\\ \text{=\$10}\end{array}$ (3)

$\begin{array}{c}\text{Change in Taxpayable=}\left[\begin{array}{l}\text{Taxpayable 2018}-\\ \text{Taxpayable 2017}\end{array}\right]\\ \text{Change in Taxpayable=\$22}-\text{\$24}\\ \text{=\$}\left(\text{2}\right)\end{array}$ (4)