Question

Comparative balance sheets for 2021 and 2020, a statement of income for 2021, and additional information from the accounting records of Red, Inc., are provided below.

RED, INC. Comparative Balance Sheets December 31, 2021 and 2020 ($ in millions)
	2021	2020
Assets
Cash	28	114
Accounts receivable	184	136
Prepaid insurance	13	8
Inventory	250	179
Buildings and equipment	451	354
Less: Accumulated depreciation	(123)	(244)
Total	803	547
Liabilities
Accounts payable	93	108
Accrued liabilities	12	18
Notes payable	54	0
Bonds payable	172	0
Shareholders’ Equity
Common stock	404	404
Retained earnings	68	17
Total	803	547

RED, INC. Statement of Income For Year Ended December 31, 2021
($ in millions)
Revenues
Sales revenue		2,020
Expenses
Cost of goods sold	1,414
Depreciation expense	41
Operating expenses	460	1,915
Net income		105

Additional information from the accounting records:

1. During 2021, $277 million of equipment was purchased to replace $180 million of equipment (90% depreciated) sold at book value.
2. In order to maintain the usual policy of paying cash dividends of $54 million, it was necessary for Red to borrow $54 million from its bank.

Required:
Prepare the statement of cash flows of Red, Inc., using the direct method to report operating activities. (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

$1,972 Cash Flow Statement Cash Flow from Operating Activities: Cash Inflow: Cash received from Customers Cash outflow: Cash paid for operating expense Cash paid to merchandise Net Cash Flow from Operating Activities ($471) ($1,500) $1 Cash Flow from Investing Activities: Equipment sold Equipment purchased Net Cash Flow from Investing Activities $18 ($277) ($259) ($54) $54 $172 Cash Flow from Financing Activities: Cash dividend paid Notes payable issued Bonds issued Net Cash Flow from Financing Activities Net Cash flow Opening cash balance Closing Cash balance $172 ($86) $114 $28

Working Note:

Cash received from Customers: Opening Accounts Receivable Add: Sales Revenue Less: Closing Accounts Receivable Cash received from Customers $136 $2,020 ($184) $1,972 Cash paid for operating expense: Operating Expense Add: Opening Accrued liabilities Less: Closing Accrued liabilities Add: Closing prepaid insurance Less: Opening prepaid insurance Cash paid for operating expense $460 $18 ($12) $13 ($8) $471 Cash paid to merchandise: Cost of Goods Sold Add: Closing inventory Less: Opening Inventory Add: Opening Accounts payable Less: Closing Accounts payable Cash paid to merchandise $1,414 $250 ($179) $108 ($93) $1,500

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