Question

Exercise 21-31 Statement of cash flows;Indirect method [LO21-4, 21-5, 21-6, 21-8] Appendix A Comparative balance sheets for 2018 and 2017. a statement of income for 2018, and additional information from the accounting records of Red, Inc., are provided below. RED, INC. Comparative Balance Sheets December 31, 2018 and 2017 ($ in millions) 2018 2017 Assets Cash $ 37 $ 136 Accounts receivable 229 135 Prepaid insurance 12 Inventory 291 178 Buildings and equipment 386 353 Less: Accumulated depreciation (122) (243) $ 564 Liabilities Accounts payable $ 99 $ 106 Accrued expenses payable Notes payable Bonds payable 210 Shareholders' Equity Common stock 403 Retained earnings 13 73 43 $564 RED, INC. Statement of Income For Year Ended December 31, 2018 ($ in millions) Revenues Sales revenue $2,020 Expenses Cost of goods sold $1,412 Depreciation expense Operating expenses 471 1,952 Net income $ 68 69 Additional information from the accounting records: g 2018, $233 million of equipment was purchased to replace $200 million of equipment (95% depreciated) sold at book value b. In order to maintain the usual policy of paying cash dividends of $73 million, it was necessary for Red to borrow $73 million from its bank.

Answer 1

Solution

RED, INC.
Cash Flow Statement
For the ended December 31, 2018
($ in millions)
Cash Flow from Operating Activities:
Net Income	$         68.00
Add: Adjustments for non cash effects
Depreciation expense	$         69.00
Changes in operating assets and liabilities
Increase in Accounts receivables	$      (85.00)
Increase in prepaid insurance	$         (7.00)
Increase in Inventory	$    (113.00)
Decrease in Accounts Payable	$      (16.00)
Decrease in accrued expense payable	$         (2.00)
A. Cash Flow from Operating Activities		$        (86.00)
Cash Flow from Investing Activities:
Sale of Equipment	$         10.00
Purchase of Equipment	$    (233.00)
B. Cash flow from Investing Activities		$     (223.00)
Cash Flow from Financing Activities:
Dividend paid	$      (73.00)
Proceeds from issue of bonds	$      210.00
Proceeds from notes payable	$         73.00
C. Cash Flow from Financing Activities		$        210.00
Increase (Decrease) in cash [A+B+C]		$        (99.00)
Cash, January 1		$        136.00
Cash , December 31		$          37.00

.General notes for cash flow
Cash is increased when Current liability increase or Current asset Decrease.
Cash is Decreased when Current liability Decrease or Current asset Increase.
Depreciation or loss on sale of any asset is a non cash expense hence it will be added to net income to get operating cash
Profit on sale of asset or investment is a non cash profit and hence will be deducted from operating income.