Question

Problem 21-5 Statement of cash flows; direct method [LO21-3, 21-8]

Comparative balance sheets for 2018 and 2017 and a statement of income for 2018 are given below for Metagrobolize Industries. Additional information from the accounting records of Metagrobolize also is provided.

METAGROBOLIZE INDUSTRIES Comparative Balance Sheets December 31, 2018 and 2017 ($ in 000s)
		2018			2017
Assets
Cash	$	560			$	370
Accounts receivable		710				370
Inventory		860				440
Land		700				670
Building		900				900
Less: Accumulated depreciation		(200	)			(160)
Equipment		3,400				3,230
Less: Accumulated depreciation		(343	)			(300	)
Patent		1,800				2,100
	$	8,387			$	7,620
Liabilities
Accounts payable	$	960			$	710
Accrued expenses payable		330				260
Lease liability—land		130				0
Shareholders' Equity
Common stock		3,680				3,500
Paid-in capital—excess of par		800				740
Retained earnings		2,487				2,410
	$	8,387			$	7,620

METAGROBOLIZE INDUSTRIES Income Statement For the Year Ended December 31, 2018 ($ in 000s)
Revenues
Sales revenue	$	3,131
Gain on sale of land		80		$	3,211
Expenses
Cost of goods sold	$	1,160
Depreciation expense—building		40
Depreciation expense—equipment		664
Loss on sale of equipment		25
Amortization of patent		300
Operating expenses		350			2,539
Net income				$	672

Additional information from the accounting records:

1. Annual payments of $20,000 on the finance lease liability are paid each January 1, beginning in 2018.
2. During 2018, equipment with a cost of $690,000 (90% depreciated) was sold.
3. The statement of shareholders' equity reveals reductions of $240,000 and $355,000 for stock dividends and cash dividends, respectively.

Required:
Prepare the statement of cash flows of Metagrobolize for the year ended December 31, 2018. Present cash flows from operating activities by the direct method. (Enter your answers in thousands (i.e., 5,000 should be entered as 5). Amounts to be deducted should be indicated with a minus sign.)

Answer 1

Solution

Metagrobolize Industries

Cash flow statement (Direct Method)

Metagrobolize Industries
Statement of Cash Flows (Direct Method)
For the Year Ended December 31, 2018
Cash from operations:
Cash received from customers	$2,791
Cash paid to suppliers	($1,330)
cash paid to operating expenses	($280)
Cash Provided by Operating Activities		$1,181
Cash from investing activities:
Purchase of equipment	($860)
Sale of equipment	$44
sale of land	$180
Cash Used by Investing Activities		($636)
Cash from Financing Activities:
Cash dividends	($355)
Cash Used by Financing Activities		($355)
Increase in Cash		$190
Beginning Cash Balance		$370
Ending Cash Balance		$560

Computations:

1. Cash received from customers = sales – increase in accounts receivable

= $3,131 – (710 – 370) = 3,131- 340

Cash received from customers = $2,791

2. Cash paid to suppliers:

Cash paid to suppliers = cost of goods sold + increase in inventory – increase in accounts payable

Cost of goods sold = $1,160

Increase in inventory = 860 – 440 = $420

Increase in accounts payable = 960 – 710 = $250

Cash paid to suppliers = 1,160 + 420 – 250 = $1,330

3. Cash paid to operating expenses:

Operating expenses – increase in accrued expenses payable

Operating expenses = $350

Increase in accrued expenses payable = 330 – 260 = $70

Cash paid to operating expenses = $350 - $70 = $280

4. Land –

Beg. Balance = $670

Land on lease = $130

Total = $800

Less: ending balance = $700

Cost of land sold = $100

Add: gain on sale = $80

Sale proceeds = $180

5. Equipment –

Beg. Balance = 3,230

Less: cost of equipment sold = 690

Total = $2,540

Less: ending balance = 3,400

Purchase of equipment = $860

Sale proceeds from equipment sales –

Book value of equipment sold = 690 x 10% = $69

Less: loss on sale = $25

Sale proceeds = $44