Question

Part Three - Statement of Cash Flows (indirect method) Ignoring all of the previous information, use the information provided below to prepare a statement of Cash Flows using the indirect method. Use worksheet #8. Botswana Tea Company, Inc. Comparative Balance Sheet December 31, 2018 and 2017 Assets 2018 Cash 100,000 Accounts receivable (net) 78,000 Inventories 101,500 Machinery and equipment 410,000 Accumulated depreciation-machinery & equipment (150,000) Total assets 539,500 2017 78,000 85,000 90,000 370,000 (158,000) 465,000 Liabilities and Stockholders' Equity Accounts payable (merchandise creditors) Dividends payable Common stock, $10 par Excess of issue price over par - common stock Retained earnings Total liabilities and stockholders' equity 58,500 5,000 200,000 62,000 214,000 539,500 55,000 4,000 170,000 60,000 176,000 465,000 Additional information: Equipment costing $125,000 was purchased for cash. Equipment costing $85,000 with accumulated depreciation of $65,000 was sold for $15,000. 3. The stock was issued for cash. The only entries in the retained earnings account were net income of $51,000 and cash dividends declared of $13,000. Prepare a statement of cash flows using the indirect method of reporting cash flows from operating activities.

Answer 1

In calculating the cash flows statement from indirect method, we will start with the net income. We will add back the non cash item of depreciation & loss on sale of equipment in it. Then we will adjust the amount for increase or decrease in cash due to increase or decrease in current assets or current liabilities.Like, an increase in current assets will reduce cash, so we will deduct it and a decrease in current assets will increase cash, so we will add it. Similarly, an increase in current liabilities will increase cash, so it will be added and a decrease in current liabilities will reduce cash, so it will be deducted. Before proceeding with the cash flow statement, we will check for certain adjustments given as below:

(1) Loss on equipment calculation:

Sale price of the equipment : $15000

Less: Book value of the equipment sold : $20000 (i.e. $85000 - $65000)

Gain or (loss) on sale = ($5000)

(2) Depreciation expense calculation:

Ending accumulated depreciation: $150000

Less: Beginning accumulated depreciation: ($158000)

Add: Depreciation of equipment sold: $65000

Depreciation expense for current year: $57000

With the above adjustments, cash flow statements for 2018 is given below:

Description	Amount	Amount
Operating activities:
Net income	51000
Adjustments to reconcile net income to operating activities
Add: Depreciation	57000
Add: Loss on sale of equipment	5000
Add: Decrease in accounts receivable	7000
Less: Increase in inventories	(11500)
Add: Increase in accounts payable	3500
Add: Increase in dividends payable	1000
Cash flows from operating activities		113000
Investing activities:
Purchase of equipment	(125000)
Proceeds from sale of equipment	15000
Cash flows from investing activities		(110000)
Financing activities:
Proceeds from issue of common stock	30000
Proceeds from issue of excess of issue price over par value	2000
Cash dividends	(13000)
Cash flows from financing activities		19000
Net increase in cash		22000
Beginning cash balance		78000
Ending cash balance		100000