Question

Statement of Cash Flows—Indirect Method

List the errors you find in the following statement of cash flows. The cash balance at the beginning of the year was $240,000. All other amounts are correct, except the cash balance at the end of the year.

Shasta Inc.
Statement of Cash Flows
For the Year Ended December 31, 20Y9
Cash flows from operating activities:
Net income			$360,000
Adjustments to reconcile net income to net cash flow from operating activities:
Depreciation			100,800
Gain on sale of investments			17,280
Changes in current operating assets and liabilities:
Increase in accounts receivable			27,360
Increase in inventories			(36,000)
Increase in accounts payable			(3,600)
Decrease in accrued expenses payable			(2,400)
Net cash flow from operating activities					$463,440
Cash flows from investing activities:
Cash received from sale of investments			$240,000
Cash paid for purchase of land			(259,200)
Cash paid for purchase of equipment			(432,000)
Net cash flow used for investing activities					(415,200)
Cash flows from financing activities:
Cash received from sale of common stock			$312,000
Cash paid for dividends			(132,000)
Net cash flow from financing activities					180,000
Change in cash					$47,760
Cash at the end of the year					192,240
Cash at the beginning of the year					$240,000

a. Answer the following questions. Use your answers to help you in locating errors for the above statement of cash flows.

Item	Yes or No
1. Depreciation should be added to net income.
2. Gain on sale of investments should be added to net income.
3. Increases in accounts payable should be deducted from net income.
4. Increases in accounts receivable should be added to net income.
5. Cash paid for property, plant, and equipment should be deducted under investing.
6. Cash received from sale of common stock should be added under financing.

b. Enter the corrected amounts below. Use the minus sign to indicate cash out flows, cash payments, decreases in cash, or any negative adjustments.

Net cash flow from operating activities	$
Net cash flow used for investing activities	$
Net cash flow provided by financing activities	$

c. Based on the corrected amounts above and the fact that the correct cash balance at the beginning of the year was $240,000, enter the corrected amounts for the increase in cash and the cash balance at the end of the year.

Change in cash	$
Cash at the end of the year	$

Answer 1

Yes or No Yes No Item 1. Depreciation should be added to net income. 2. Gain on sale of investments should be added to net income. 3. Increases in accounts payable should be deducted from net income. 4. Increases in accounts receivable should be added to net income. 5. Cash paid for property, plant, and equipment should be deducted under investing. 16. Cash received from sale of common stock should be added under financing No No Yes Yes bNet cash flow from operating activities Net cash flow used for investing activities Net cash flow provided by financing activities 381.360 (451,200) 180,000 Change in cash Cash at the end of the year 110.160 350.160

360,000 100.800 (17,280) Working Notes: Shasta Inc. Statement of Cash flows For the Year Ended December 31, 2019 Cash flows from Operating Activities: Net Income Adjustments to reconcile Net Income to net Cash flows from Operating activities Depreciation expenses Gain on sale of investments Changes in Current Operating assets and liabilities: Increase in Accounts Receivables Increase in Inventory Increase in Accounts payable Decrease in Accured expenses payable Net Cash flow from operating activities Cash flows from investing activities: Cash received from sale of investments Cash paid for purchase of land Cash paid for purchase of equipment Net cash flow used for investing activities (27,360) (36,000) 3,600 (2.400) S 381,360 240,000 (259,200) (432,000) S (451,200)

312,000 (132.000) Cash flows from financing activities: Cash received from sale of common stock Cash paid for dividends Net cash flow from financing activities Change in cash Cash at the beginning of the year Cash at the end of the year S S $ S 180.000 110.160 240,000 350.160