Question

The comparative balance sheets for 2021 and 2020 and the statement of income for 2021 are given below for National Intercable Company. Additional information from NIC’s accounting records is provided also.

NATIONAL INTERCABLE COMPANY Comparative Balance Sheets December 31, 2021 and 2020 ($ in millions)
	2021				2020
Assets
Cash	$	137			$	115
Accounts receivable		342				335
Less: Allowance for uncollectible accounts		(7	)			(5	)
Prepaid insurance		6				11
Inventory		320				315
Long-term investment		60				95
Land		220				220
Buildings and equipment		346				320
Less: Accumulated depreciation		(119	)			(105	)
Trademark		33				35
	$	1,338			$	1,336
Liabilities
Accounts payable	$	47			$	62
Salaries payable		5				9
Deferred tax liability		17				12
Lease liability		75				0
Bonds payable		125				305
Less: Discount on bonds		(27	)			(32	)
Shareholders' Equity
Common stock		350				320
Paid-in capital—excess of par		140				110
Preferred stock		70				0
Retained earnings		536				550
	$	1,338			$	1,336

NATIONAL INTERCABLE COMPANY Income Statement For Year Ended December 31, 2021 ($ in millions)
Revenues
Sales revenue	$	470
Investment revenue		13
Gain on sale of investments		6		$	489
Expenses
Cost of goods sold		210
Salaries expense		68
Depreciation expense		30
Amortization expense		2
Bad debt expense		8
Insurance expense		32
Interest expense		50
Loss on sale of building		44			444
Income before tax					45
Income tax expense					31
Net income				$	14

Additional information from the accounting records:

1. Investment revenue includes National Intercable Company's $7 million share of the net income of Central Fiber Optics Corporation, an equity method investee.
2. A long-term investment in bonds, originally purchased for $42 million, was sold for $48 million.
3. Pretax accounting income exceeded taxable income, causing the deferred income tax liability to increase by $5 million.
4. A building that originally cost $64 million, and which was one-fourth depreciated, was destroyed by fire. Some undamaged sections were sold for $4 million.
5. The right to use a building was acquired with a seven-year lease agreement; present value of lease payments, $90 million. Annual lease payments of $15 million are paid at Jan. 1 of each year starting in 2021.
6. $180 million of bonds were retired at maturity.
7. $30 million par value of common stock was sold for $60 million, and $70 million of preferred stock was sold at par.
8. Shareholders were paid cash dividends of $28 million.

Required:
2. Prepare the statement of cash flows. Present cash flows from operating activities by the direct method. (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

$465 Ref: Workings National Intercable Company (in millions) Statement of Cash Flows For This Year Ended December 31 Cash flow from operating activities: Cash received from customers Less Cash disbursements for: Inventory $230 Operating expenses $149 Income taxes $26 Total cash disbursements Net Cash flow from operating activities Cash flow from investing activities: Cash received from selling investments $48 Cash received from selling building scraps $4 Cash paid to purchase new investments $12 Net cash flow from investing activities -$405 $60 ($95 - $42 - $60 - ($12-$7) --> Ref: Long-term investments account] $40 Cash flow from financing activities: Cash received from selling common stock Cash received from selling preferred stock Cash paid to retire bonds at maturity Cash dividends paid Net cash flow from financing activities Net increase in cash balance during the year Cash balance at beginning of period Cash balance at end of period $60 $70 $180 -$28 $78 $22 ($60 + $40 + $781 $115 $137 ($22 + $1151 Non-cash investing and financing activities: Leased-asset acquired by recording a lease liability $90

Workings: National Intercable Company (in millions) Direct Method of Determining the Net Cash Flows from Operating Activitites Sales $470 Adjustments to a cash basis: Increase in Accounts receivable $5 $465 [Increase in Net Accounts Receivable = ($342 - $7) = ($335 - $5) = $5] $210 Cost of Goods Sold Adjustments to a cash basis: Increase in Inventory Decrease in Accounts payable $5 $15 [Increase in Inventory = $315 - $320 = -$5] [Decrease in Accounts Payable = $47 - $62 = -$15] $230 $68 $32 $50 Salaries Expenses Insurance Expense Interest Expense Adjustments to a cash basis: Decrease in Prepaid expenses Decrease in Salaries payable $5 $4 [Decrease in Prepaid exps. = $11 - $6 = $5] [Decrease in Salaries Payable = $5 - $9 = -$4] $149 $31 Income Tax Expense Adjustments to a cash basis: Increase in Deferred tax liability Net Cash Flows from Operating Activities $5 [Increase in Deferred tax liability = $17 - $12 = $5] $26 $60