Question

[The following information applies to the questions displayed below.] Ravenna Company is a merchandiser that uses the indirect method to prepare the operating activities section of its statement of cash flows. Its balance sheet for this year is as follows: Cash Ending Beginning Balance Balance $ 64,400 $ 76,900 53,200 57,200 71,400 65,000 Accounts receivable Inventory Total current assets 189,000 199,100 192,000 182,000 Property, plant, and equipment Less accumulated depreciation 64,000 45,500 Net property, plant, and equipment 128,000 136,500 Total assets $317,000 $335,600 Accounts payable Income taxes payable Bonds payable Common stock Retained earnings $ 41,600 $ 74,000 32,400 39,600 78,000 65,000 91,000 78,000 74.000 79,000 Total liabilities and stockholders' equity $ 317,000 $335,600 During the year, Ravenna paid a $7,800 cash dividend and it sold a piece of equipment for $3,900 that had originally cost $8,400 and had accumulated depreciation of $5,600. The company did not retire any bonds or repurchase any of its own common stock during the year.

2.	a. What net income would the company include on its statement of cash flows? b. How much depreciation would the company add to net income on its statement of cash flows? c. What is the amount and direction (+ or −) of the accounts receivable adjustment to net income in the operating activities section of the statement of cash flows? d. What does this adjustment represent? Cash collected from customers > Credit sales Cash payments > Cash collected Cash collected from customers < Credit sale e. What is the combined amount and direction (+ or −) of the inventory and accounts payable adjustments to net income in the operating activities section of the statement of cash flows? f. What does this amount represent? Cash paid to suppliers > Purchases Cash paid to suppliers > Cost of goods sold Cash paid to suppliers < Cost of goods sold g. If the company debited income tax expense and credited income taxes payable $940 during the year, what is the total amount of the debits recorded in the Income Taxes Payable account? h.
	What does the amount of these debits represent?
	Taxes payable Cash paid for income taxes Tax refunds i. What is the amount and direction (+ or −) of the income taxes payable adjustment to net income in the operating activities section of the statement of cash flows? j. What does this adjustment represent?
	Tax paid > Income tax expenses No taxes are payable Tax paid < Income tax expenses k. Would the operating activities section of the company’s statement of cash flows contain an adjustment for a gain or a loss? What would be the amount and effect of the adjustment? l. What is the amount of net cash provided by (used in) operating activities in the company’s statement of cash flows? m. What is the amount of gross cash outflows reported in the investing section of the company’s statement of cash flows? n. What is the company’s net cash provided by (used in) investing activities? o. What is the amount of gross cash inflows reported in the financing section of the company’s statement of cash flows? p. What is the company’s net cash provided by (used in) financing activities

Answer 1

Answer:

a) Calculation of Net Income:

Net Income/loss of the year transferred to the retained earnings can be calculated using the basic accounting equation or retained earnings T-account as follow;

Opening Balance + Credits – Debits = Ending Balance

79,000 + Credit – 7,800 = 74,000

Credit = 74,000 + 7,800 – 79,000 = $2,800

"OR"

Retained Earnings
Details	$	Details	$
Dividends	7800	Opening Balance	79000
Closing Balance	74000	Net Income (Bal Fig)	2800
	81800		81800

So, net income to be included in statement of cash flows is $2,800

b) Calculation of Annual Depreciation:

In same manner as in retained earnings, prepare T-account for Accumulated Depreciation:

Accumulated Depreciation
Details	$	Details	$
PPE- Asset Sold	5600	Opening Balance	45500
Closing Balance	64000	Depreciation (Bal Fig)	24100
	69600		69600

Depreciation $24,100 to be added to the net income.

c) Adjustment for Accounts Receivables;

Change in Accounts Receivables = Ending balance – Opening Balance = 53,200 – 57,200 = ($4,000)

Accounts receivable are decreased by $4,000, it means reduction in working capital of the business and the decrease in working capital is a source of cash.

So, $4,000 decrease in accounts receivables to be added to net income.

d) Decrease in the accounts receivable represents that cash collected from the customer is greater than the credit sales made during the year.

So, option A is correct; Cash Collected from customer > Credit sales

e) Combined change in inventory and accounts payable;

Change in Inventory = 71,400 – 65,000 = $6,400, increase in inventory is a increase in working capital that means application of cash (Decrease in cash).

Change in Accounts Payable= 41,600 – 74,000 = ($32,400). Decrease in accounts payable is a increase in working capital that means application of cash (decrease in cash).

Combined decrease in cash is $38,800 (6,400 + 32,400) to be deducted from the net income.

f) Decrease in cash on account of inventory and accounts payable represent that cash paid to supplier is greater than purchases made during the year.

So, Option A is correct; Cash paid to suppliers > Purchase.