Question

Portland Merchantile, December 31, 20XX 1a) Create a cash flow statement in good form. 1) Use the following income statement, retained earnings statement, and balance sheet to prepare a cash flow statement for the current year. Income Statement Reven Current Ye. $875.000 $524,000 $351,000 Cost of Goods Sold Gross Profit Administrative Expenses: Rent Expense Wages Expense Depreciation Expense Loss on Sale of Factory Machine Total Expenses Net Income $100,000 $125,000 $33,000 $4,000 $262.000 $89,000 Retained Earnings Statement Beginning Retained Earnings Add Net Income (Subtract Loss) Less Dividends Paid Ending Retained Earnings Current Yr. $175,000 $89,000 ($50,000) $214,000 Current Yr. Prior Yr. Balance Sheet Assets Cash Accounts Receivable Inventory Total Current Assets Factory Machines Less Accumulated Depreciation Buildings Less Accumulated Depreciation Total Assets $86,000 $40,000 $80,000 $45,000 $223,000 $180,000 $389,000 $265,000 $210,000 $200,000 ($200,000) ($195,000) $800,000 $800,000 ($280,000) ($260,000) $919.000 $810,000

Answer 1

Note Amount 1 89,000 2 33,000 Cash Flow Statement of Portland Mercantiles Operating Cash Flow Particulars Net profit during the year Add: Non Cash items in P&L Depreciation Add: Other Addition Decrease/Increase) in Account Receivable Decrease/Increase) in Inventory (Decrease)/Increase in Account Payable (Decrease)/Increase in Taxes Payable Loss on sale of assets (to be shown as investing activity) Net Cash Flow from Operating activities (1+2+3+4+5+6+7) 3 (35,000) (43,000) 10,000 (15,000) 4,000 7 43,000 Investment Cash Flow Factory Equipment purchased Factory Equipment Sold Net Cash Flow from Investment activities (9+10) (25,000) 3.000 (22,000) 11 Financial Cash Flow New Equity Issued during the year Dividend paid during the year Short term notes paid during the year Long term notes issued during the year Bonds paid during the year Net Cash Flow from Financial activities (12+13+14+15+16) 70,000 (50,000) (20,000) 60,000 (35,000) 25,000 Net Cash Flow generated during the year (8+11+17) Opening Cash Closing Cash (18+19) 19 46,000 40,000 86,000 20 Explanations: Following is the explanation with note no. wise as above (only necessary explanation has been given) 1) Note No. 7: Loss on equipment sold has been considered as expenses in P&L account which is not part of companies operations hence it has been separately considered in investment cash flow activity 2) Note No. 10: Factory equipment has been sold for $3000, effect of the same has been given in investment cash flow as above.

3) Note No. 12: Opening equity is $130000 and Closing Equity is $200000, hence it is clear that the company has issued new equity of $70000 in the current year. 4) Note No. 14: short term notes of $20000 has been paid during the year as opening balance is $45000 and closing balance is $25000 of the same in current liabilities part. 5) Note No. 15: new Long Term notes of $60000 has been issued during the year as opening balance is $40000 and closing balance is $10000 of the same. 6) Note No. 16: Bonds issued earlier has been paid of $35000 during the year as opening balance is $285000 and closing balance is $250000 of the same. Further following are the answers of other points: 1) All type of cash flow (Operating, Investment and Financing) shows some important message, however in our cash flow, following numbers are important to study: • Operating cash flow is 43,000 which shows that company is doing any operating loss which is a good sign; Investment cash flow shows that company has purchased new machinery of $25000 during the year which may be for either expanding the current capacity or replacing any existing equipment. Financing cash flow shows that company has raised amount of $70,000 through new equity issued and $60,000 through Long term notes issued during the year. • Company has also paid dividend of $50000 during the year. 2) Free Cash Flow of the company is the amount remaining after purchasing of any fixed assets during the year, in the current year following is the free cash flow in the company Particulars Amount Cash generated from operations 43,000 Less: Purchase of fixed assets 25,000 Net Cash Flow (Free Cash Flow) 18,000 3) Free cash flow indicates that how much cash a business generates after capital expenditure such as building or equipments.