Question

CHAPTER 12 Statement of Cash Flows 593 Required: LO 12-1, 12-2, 12-3, 124, 12-5 Determine whether the following account balances increased (I) or decreased (D) during the period: (a) Accounts Receivable. (h) Inventories. (c) Accounts Payable, and (d) Accrued Liabilities. E12-13 Preparing and Evaluating a Statement of Cash Flows (Indirect Method) from Comparative Balance Sheets and Income Statements Consultex, Inc. was founded in 2015 as a small financial consulting business. The company had done reasonably well in 2015-2017 but started noticing its cash dwindle early in 2018. In January 2018. Consultex had paid S16,000 to purchase land and repaid $2.000 principal on an existing promissory note. In March, the company paid $2,000 cash for dividends and S1,000 to repurchase and eliminate Consultex stock that had previously heen issued for $1.000. To improve its cash position, Consultex borrowed $5,000 by signing a new promissory note in May and also issued stock to a new private investur for $12,000 cash. Year-end comparative balance sheets and income statements are presented below. CONSULTEX, INC. Balance Sheet October 31 2018 2017 $11,000 14,000 2,000 26.000 $53,000 $14.000 12,000 3.000 10.000 $39.00) Assets Cash Accounts Receivable Prepaid Rent Land Total Assets Liabilities and Stockholders' Equity Salaries and Wages Payable Income Taxes Payable Notes Payable (long-term) Common Stock Retainei Farnings Total Liabilities and Stockholders' Equity $ 3.000 1.000 12.000 $ 2.000 1.000 15,000 20,000 15.000 $53,000 14.000 $39.000 CONSULTEX, INC. Income Statement For the Year Ended October 31 2018 2017 Sales Revenue Salaries and Wages Expense Rent Expense Utilities Expenses Income before Income Tax Expense Income Tax Expense Net Income $158,000 98,000 36.000 19,700 4.300 1,300 $ 3,000 $161.000 97,000 30,0XX) 20.000 14,000 4,200 S 9.800) Requirements: 1. Prepare a properly formalled Statement of Cash Flows for Consultex, Inc., for the year ended October 31, 2018 (using the indirect method). 2. What one thing can Consultex reasonably change in 2019 to avoid depleting its cash?

Answer 1

A Cash flow statement provides the following information:
1) Information about company's cash receipt and cash payment during an accounting period.
2) Information about company's operating, investing and financing activities.
3) Information access the company's liquidity, solvency and financing flexibility.
Under the indirect method, net income is converted operating cash flow by making adjustments for the transaction that effect net income but are non cash transactions. The adjustment includes eliminating non cash expenses, non operating items and the changes in the balance sheet account on account of accrual accounting events.

Cash flow from operating activities (CFO), consists of the inflows and outflows of cash resulting from revenue and expense transactions that affect a firm's net income.

Cash flow from investing activities (CFI) consists of the inflow and outflows of cash resulting from the acquisition of long term assets and investment.

Ans 1 Amount $3,000 Consultex Inc Statement of Cash Flows For year ended October 31, 2018 Particulars Amount Cash Flow from Operating Activity Net Income Adjustment reconcile net income net cash flow from operating activities Increase in Accounts Receivable ($2,000) Decrease in Prepaid Rent $1,000 Decrease in salaries and wages payable ($1,000) Changes in Working Capital Net Cash from Operating Activity Cash Flow from (used for) Investing Activity Purchase of Land ($16,000) Net Cash used in Investing Activity Cash Flow from (used for) Financing Activity Proceeds from notes payable $3,000 Proceeds from issue of common stock $11,000 Dividend paid ($2,000) Net Cash from Financing Activity Net Decrease in Cash and Cash Equivalents Add : Opening Cash Closing Cash ($2,000) $1,000 ($16,000) $12,000 ($3,000) $14,000 $11,000

Working Particulars Closing Balance Opening Balance Assets (A) Accounts Receivable $14,000 $12,000 Prepaid Rent $2,000 $3,000 Salaries and Wages Payable $2,000 $3,000 Income Taxes Payable $1,000 $1,000 Increase in Current Assets is Cash Outflow and Decrease in Current Assets in Cash Inflow Increase in Current Liability is Cash Inflow and Decrease in Current Liability in Cash Outflow Increase /(Decrease) (A) - (B) $2,000 ($1,000) ($1,000) $0 2 Beginning Retained earnings Add: Net Income Less: Ending Retained Earnings Dividend paid $14,000 $3,000 ($15,000) $2,000 Ans 2 Consultax Inc should decrease its accounts receivable in 2019 to avoid depletion of cash.

Cash Flow from financing activities (CFF) consists of the inflow and outflows of cash resulting from transactions affecting a firm's capital structure.