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Unit 9 - Statement of Cash Flow As the accountant for Awesome Foods Incorporated, you are...

Unit 9 - Statement of Cash Flow

As the accountant for Awesome Foods Incorporated, you are responsible for preparing the cash flow statement. You have decided to prepare the statement using the indirect method and have gathered the following data from the accounting records:

Principal payments on non-current debt                                              $ 50,000

Collections on accounts receivable                                                         287,500

Increase in accounts payable                                                                      24,300

Acquisition of equipment by issuing non-current note payable        70,000

Depreciation expense                                                                                   71,300

Collection of loan principal                                                                        58,000

Proceeds from sale of investments, not including $5,100 gain           49,100

Increase in accounts receivable                                                                    7,200

Cash payments to purchase capital assets                                              62,000

Decrease in accrued liabilities                                                                    30,600

Payment of cash dividends                                                                        46,500

Income tax expense and payments                                                           39,300

Proceeds from sale of capital assets, not including $7,400 loss          22,600

Net income                                                                                                   147,100

Cash sales                                                                                                     217,400

Proceeds from issuance of common shares                                          300,000

Increase in inventory                                                                                    41,700

Loan to another company                                                                           60,000

Bonds payable converted into common shares                                    130,000

Payments to suppliers                                                                               283,100

Decrease in prepaid expenses                                                                    12,800

Cash balance: December 31, 2016                                                              62,500

Cash balance: December 31, 2017                                                            452,000

Prepare the cash flow statement for the year ended December 31, 2017, using the indirect method.

Your best friend just lost his job because the company he was working for went bankrupt. He was complaining to you that even though the company had been profitable for three years in a row, it still went out of business. He asks you how this can happen.

Explain the most likely reason for the company declaring bankruptcy. Could your best friend have seen it coming? How?

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Answer #1

$147,100 AWESOME FOODS Statement of Cash flows (Indirect method) Cash flows from Operating Activities Net Profit Adjustments

The reason for bankruptcy is the cash flows of the firm. The net income and expense is reported based on the accrual concept in Income statement and hence it ignores the cash flows of the firm. A Higher profitable firm need not be solvent if its cash flows are not well managed. For example if it has higher inventory and receivables and lower payables the cash flows can be lower than the net profit reported. The cash flows of the firm play a big role to remain solvent and net profit is not the indicator of solvency for the firm.

Yes, my best friend could have seen it coming by reading the cash flow statement which is part of the financial statements issued by the firm. Cash flow statement gives details of operating, investing and financing activities of the firm during the year. They show the net movement in the cash during the year and help in analysing and taking informed decisions.

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