Question

CA23-3 (SCF Theory and Analysis of Transactions) Ashley Company is a young and growing producer of electronic measuring instruments and technical equipment. You have been retained by Ashley to advise it in the preparation of a statement of cash flows using the indirect method. For the fiscal year ended October 31, 2017, you have obtained the following information concerning certain events and transactions of Ashley.

1. The amount of reported earnings for the fiscal year was $700,000, which included a deduction for a loss of $110,000 (see item 5 below).

2. Depreciation expense of $315,000 was included in the income statement.

3. Uncollectible accounts receivable of $40,000 were written off against the allowance for doubtful accounts. Also, $51,000 of bad debt expense was included in determining income for the fiscal year, and the same amount was added to the allowance for doubtful accounts.

4. A gain of $6,000 was realized on the sale of a machine. It originally cost $75,000, of which $30,000 was undepreciated on the date of sale.

5. On April 1, 2017, lightning caused an uninsured building loss of $110,000 ($180,000 loss, less reduction in income taxes of $70,000). This loss was included in determining income as indicated in item 1 above.

6. On July 3, 2017, building and land were purchased for $700,000. Ashley gave in payment $75,000 cash, $200,000 market price of its unissued common stock, and signed a $425,000 mortgage note payable.

7. On August 3, 2017, $800,000 face value of Ashley’s 10% convertible debentures was converted into $150,000 par value of its common stock. The bonds were originally issued at face value.

Instructions

Explain whether each of the seven numbered items above is a cash inflow or outflow, and explain how it should be disclosed in Ashley’s statement of cash flows for the fiscal year ended October 31, 2017. If any item is neither an inflow nor an outflow of cash, explain why it is not, and indicate the disclosure, if any, that should be made of the item in Ashley’s statement of cash flows for the fiscal year ended October 31, 2017.

Answer 1

Answer .

1. The reported earnings should form part of of cash flow from operating activities as these earnings are a source of cash.

2.The depreciation is a non-cash expense but its neither inflow or outflow of cash. However, as it has been deducted while calculating net income.Therefore, $315,000 will be added back to income before extraordinary items in the operating activities section.

3. Uncollectible accounts receivable of $40,000 adjusted has no effect on cash inflow or outflow and therefore, no changes will be made.

The $51,000 of bad expense does not affect cash would be added back to income because it affects the amount of net accounts receivable.

4.The $9000 gain realized on the sale of machine is an ordinary gain, not an extraordinary gain for accounting purpose. This $9000 gain must be deducted from net income to arrive at net cash provided by operating activities. The proceeds of $39,000 are shown as a cash inflow from investing activities.

5. As the lighting loss did not cause any inflow or outflow of cash, the net loss will be added back to net income as one of the adjustments to reconcile net income to net cash flow from operating activities.

6.The $75,000 will be shown as the cash outflow while stock and mortgage note are noncash payments and should be reported as non cash financing and investing activities.

7.This is neither inflow or outflow of cash but is a important non cash financing activity and shall be reported in a separate schedule or note.