Question

The comparative balance sheets for 2018 and 2017 are given below for Surmise Company. Net income for 2018 was $80 million.

SURMISE COMPANY Comparative Balance Sheets December 31, 2018 and 2017 ($ in millions)
	2018				2017
Assets
Cash	$	55			$	58
Accounts receivable		89				106
Less: Allowance for uncollectible accounts		(24	)			(4	)
Prepaid expenses		19				16
Inventory		132				110
Long-term investment		89				50
Land		98				98
Buildings and equipment		400				270
Less: Accumulated depreciation		(137	)			(108	)
Patent		25				26
	$	746			$	622
Liabilities
Accounts payable	$	19			$	42
Accrued liabilities		4				20
Notes payable		48				0
Lease liability		122				0
Bonds payable		64				132
Shareholders’ Equity
Common stock		69				50
Paid-in capital—excess of par		261				205
Retained earnings		159				173
	$	746			$	622

Required:
Prepare the statement of cash flows of Surmise Company for the year ended December 31, 2018. Use the indirect method to present cash flows from operating activities because you do not have sufficient information to use the direct method. You will need to make reasonable assumptions concerning the reasons for changes in some account balances. A spreadsheet or T-account analysis will be helpful. (Hint: The right to use a building was acquired with a seven-year lease agreement. Annual lease payments of $8 million are paid at January 1 of each year starting in 2018.) (Enter your answers in millions (i.e., 10,000,000 should be entered as 10). Amounts to be deducted should be indicated with a minus sign.)

Answer 1

Amount Amount (14) Cash Flow Statement of Surmise Company Particulars Net profit before tax ($159 - $173) Add Adjustments for: Depreciation (137 - 108) Amortization of patent (26-25) Operating profit before Working capital changes Add: Increase in Current Liabilities Increase in Provision for uncollectibles Increase in Notes payable Add: Decrease in Current Assets Increase in Accounts receivables Less: Decrease in Current Liabilties Decrease in Accounts payable Decrease in Accrued liabilties Less: Increase in Current Assets Increase in Prepaid expenses Increase in Inventory Operating profit before tax Less: Tax paid Cash flow from Operating Activities (39) Investing Activities: Purchase of Long term Investments Purchase of Buildings and Equipment Cash flow from Investing Activities 130) (169) Financing Activities: Proceeds from Issue of Common Stock Issue of Paid in capital (Excess of Par) Proceeds from Lease Redemption of Bonds payable Cash flow from Financing Activities Decrease in Cash and Cash equivalents during the year Add: Cash and Cash Equivalents at the beginning of the year (2017) Cash and Cash Equivalents at the ending of the year (2018)

* it is assumed that decrease in Patents is due to its amortization

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