Question: What accounts on the balance sheet must be evaluated when completing the investing activities section of the statement of cash flows?
Investing activity records transactions related to long-term assets and long-term note receivables.
While computing cash generated from or used for investing activities it is important to evaluate the T-accounts of each long-term asset. Always remember that accumulated depreciation should be adjusted in operating activities only.
Long-term note receivables are also adjusted in cash flow from investing activities.
Computing operating activities cash flow—indirect method
The records of Vintage Color Engraving reveal the following:
Net income $ 36,000
Depreciation expense $ 5,000
Sales revenue 53,000
Decrease in current liabilities 19,000
Loss on sale of land 4,000
Increase in current assets other than cash 10,000
Acquisition of land 35,000
Compute cash flows from operating activities by the indirect method for year ended December 31, 2018.
Classic Rare Coins (CRC) was formed on January 1, 2018. Additional data for the year follow:
a. On January 1, 2018, CRC issued no-par common stock for $525,000.
b. Early in January, CRC made the following cash payments:
1. For store fixtures, $51,000
2. For merchandise inventory, $240,000
3. For rent expense on a store building, $18,000
c. Later in the year, CRC purchased merchandise inventory on account for $243,000. Before year-end, CRC paid $153,000 of these accounts payable.
d. During 2018, CRC sold 2,800 units of merchandise inventory for $325 each. Before year-end, the company collected 95% of this amount. Cost of goods sold for the year was $290,000, and ending merchandise inventory totaled $193,000.
e. The store employs three people. The combined annual payroll is $82,000, of which CRC still owes $5,000 at year-end.
f. At the end of the year, CRC paid income tax of $17,000. There were no income taxes payable.
g. Late in 2018, CRC paid cash dividends of $38,000.
h. For store fixtures, CRC uses the straight-line depreciation method, over five years, with zero residual value.
1. What is the purpose of the statement of cash flows?
2. Prepare CRC’s income statement for the year ended December 31, 2018. Use the single-step format, with all revenues listed together and all expenses listed together.
3. Prepare CRC’s balance sheet at December 31, 2018.
4. Prepare CRC’s statement of cash flows using the indirect method for the year ended December 31, 2018.
Preparing the statement of cash flows—indirect method, evaluating cash flows, and measuring free cash flows
The comparative balance sheet of Robeson Educational Supply at December 31, 2018, reported the following:
2018 2017 Current Assets: Cash $ 83,900 $ 20,500 Accounts Receivable 14,500 21,800 Merchandise Inventory 61,800 60,400 Current Liabilities: Accounts Payable 29,600 28,100 Accrued Liabilities 10,500 11,900 Robeson’s transactions during 2018 included the following:
Payment of cash dividends $ 21,200
Depreciation expense $ 17,400
Purchase of equipment with cash 54,400
Purchase of building with cash 103,000
Issuance of long-term notes payable to borrow cash 44,000
Net income 63,600
Issuance of common stock for cash 111,000
1. Prepare the statement of cash flows of Robeson Educational Supply for the year ended December 31, 2018. Use the indirect method to report cash flows from operating activities.
2. Evaluate Robeson’s cash flows for the year. Mention all three categories of cash flows, and give the reason for your evaluation.
3. If Robeson plans similar activity for 2018, what is its expected free cash flow?
Question: Owl, Inc.’s accountants have assembled the following data for the year ended December 31, 2018: Cash receipt from sale of equipment $ 20,000
Depreciation expense 12,000
Cash payment of dividends 4,000
Cash receipt from issuance of common stock 12,000
Net income 30,000
Cash purchase of land 25,000
Increase in current liabilities 10,000
Decrease in current assets other than cash 8,000
Prepare Owl’s statement of cash flows using the indirect method for the year ended December 31, 2018. Assume beginning and ending Cash are $12,000 and $75,000 respectively
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