Question

7.

The comparative balance sheets for 2018 and 2017 and the income statement for 2018 are given below for Arduous Company. Additional information from Arduous’s accounting records is provided also.

ARDUOUS COMPANY Comparative Balance Sheets December 31, 2018 and 2017 ($ in millions)
	2018				2017
Assets
Cash	$	149			$	101
Accounts receivable		210				234
Investment revenue receivable		27				24
Inventory		228				220
Prepaid insurance		25				33
Long-term investment		217				145
Land		236				170
Buildings and equipment		432				440
Less: Accumulated depreciation		(118	)			(160	)
Patent		52				55
	$	1,458			$	1,262
Liabilities
Accounts payable	$	70			$	105
Salaries payable		27				38
Bond interest payable		29				24
Income tax payable		32				40
Deferred income tax liability		51				28
Notes payable		33				0
Lease liability		95				0
Bonds payable		235				315
Less: Discount on bonds		(42	)			(50	)
Shareholders’ Equity
Common stock		490				430
Paid-in capital—excess of par		135				105
Preferred stock		95				0
Retained earnings		237				227
Less: Treasury stock		(29	)			0
	$	1,458			$	1,262

ARDUOUS COMPANY Income Statement For Year Ended December 31, 2018 ($ in millions)
Revenues and gain:
Sales revenue	$	600
Investment revenue		31
Gain on sale of treasury bills		3		$	634
Expenses and loss:
Cost of goods sold		200
Salaries expense		93
Depreciation expense		13
Patent amortization expense		3
Insurance expense		27
Bond interest expense		48
Loss on machine damage		33
Income tax expense		56			473
Net income				$	161

Additional information from the accounting records:

1. Investment revenue includes Arduous Company’s $27 million share of the net income of Demur Company, an equity method investee.
2. Treasury bills were sold during 2018 at a gain of $3 million. Arduous Company classifies its investments in Treasury bills as cash equivalents.
3. A machine originally costing $110 million that was one-half depreciated was rendered unusable by a flood. Most major components of the machine were unharmed and were sold for $22 million.
4. Temporary differences between pretax accounting income and taxable income caused the deferred income tax liability to increase by $23 million.
5. The preferred stock of Tory Corporation was purchased for $45 million as a long-term investment.
6. Land costing $66 million was acquired by issuing $33 million cash and a 15%, four-year, $33 million note payable to the seller.
7. The right to use a building was acquired with a 15-year lease agreement; present value of lease payments, $102 million. Annual lease payments of $7 million are paid at the beginning of each year starting January 1, 2018.
8. $80 million of bonds were retired at maturity.
9. In February, Arduous issued a stock dividend (12.0 million shares). The market price of the $5 par value common stock was $7.50 per share at that time. Also the company paid a cash dividend.
10. In April, 1 million shares of common stock were repurchased as treasury stock at a cost of $29.00 million.

Required:
Prepare the statement of cash flows of Arduous Company for the year ended December 31, 2018. Present cash flows from operating activities by the direct method. (Do not round your intermediate calculations. 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

Arduous Company Statement of Cash Flows For year ended December 31, 2018 ($ in millions) Cash flows from operating activities: Cash inflows: From customers 624 From investment revenue From sale of cash equivalents 3 Cash outflows: To suppliers of goo ds To employees - 243 104 For insurance 19 For bond interest 35 For income taxes 41 Net cash flows from operating activities 186 Cash flows from investing activities: Sale of machine components 22 Purchase of long-term investment 45 Purchase of land 33 Net cash flows from investing activities 56 Cash flows from financing activities: Retirement of bon ds payable Retirement of le ase liability Sale of preferred stock Payment of cash dividends Purchase of treasury stock Net cash flows from financing activities 80 7 95 61 29 82 Net increase in cash 48 Cash balance, January 1 101 Cash balan ce, December 31 149 Noncash investing and financing activities: Acquired land with cash and note 33 acquired building with lease 102

*Working note: Payment to employees Salaries payable, at beg collection from customer Payment for Income tax Income tax payable, ,at beg Accounts receivable, at beg 234 38 40 Add: sales Add salariesexpense Add: Income tax expense 600 93 56 Accounts rece ivab le, at end Less Salaries payable, at end Less:Income tax payable, ,at end Add:Deferred in come tax liability, at beg Less: Deferred incometax liabil ity, at end - 210 27 32 collection from customer 624 Payment to employees 104 28 51 Payment for Income tax 41 cash received From investment revenue Payment for insurance cal cul ati on of cash dividend paid Investment revenue receivable, at beg Add: Investment revenue Prepaid insurance, at end 24 25 Add: Insurance expense Retained earning, Dec31, 2017 Add: net income 31 27 227 Less Prepaid insurance, at beg Less: share of net income 27 33 161 Less: stock dividend (12*7.5) Investment revenue receivable, at end 27 Payment for in suran ce 19 90 cash received From investment revenue Less:Retained earning, Dec 31, 2018 1 -237 Cash dividend paid Payment for Bond interest Bond interest payable, at beg 61 Payment to supplier 24 Accounts payable, at beg Add : Bond interest expense 105 48 Add: cost of goods sold Less Bond interest payable, at end 200 29 Less:Accounts payable, at end Add : Discount on bonds, at end 70 42 Less:Inventory, at beg Less Discount on bonds, at beg 220 50 Add:Inventory, at end 228 Payment for Bond interest Payment to supplier 243