Question

The 2017 and 2016 balance sheets of Rabb Corporation follow. The 2017 income statement is also provided. Rabb had no noncash investing and financing transactions during 2017. During the year, the company sold equipment for $15, 100, which had originally cost $13,500 and had a book value of $10,500. The company did not issue any notes payable during the year but did issue common stock for $31,000. The company purchased plant assets and long-term investments with cash.

Requirements:

1. Prepare the statement of cash flows for Rabb Corporation for 2017 using the indirect method.

2. Evaluate the​ company's cash flows for the year. Discuss each of the categories of cash flows in your response.

Answer 1

(1) In calculating the cash flows statement from indirect method, we will start with the net income. We will add back the non cash item of depreciation & deduct gain on sale PPE in it. Then we will adjust the amount for increase or decrease in cash due to increase or decrease in current assets or current liabilities.Like, an increase in current assets will reduce cash, so we will deduct it and a decrease in current assets will increase cash, so we will add it. Similarly, an increase in current liabilities will increase cash, so it will be added and a decrease in current liabilities will reduce cash, so it will be deducted. Before proceeding with the cash flow statement, we will check for certain adjustments given as below:

(a) Purchase of equipment calculation:

Beginning PP& E : $138000

Less: PP& E sold: ($13500)

Less: Ending PP&E: ($15200)

PP&E purchased:  $27500

(b) Dividend paid calculation:

Beginning retained earnings: $8500

Add: Net income : $185300

Less: Ending retained earnings: ($171500)

Dividend paid : $22300

Statement of cash flows for 2017:

Description	Amount	Amount
Net income	185300
Adjustments to reconcile net income to cash basis
Add: Depreciation expense	5900
Less: Gain on sale of PP&E	(4600)
Less: Increase in accounts receivable	(3200)
Add: Decrease in inventory	6500
Less: Increase in prepaid insurance	(700)
Less: Decrease in accounts payable	(2600)
Less: Decrease in wages payable	(4400)
Add: Increase in interest payable	2100
Add: Increase in income taxes payable	5400
Less: Decrease in other accrued expenses payable	(4000)
Net cash from operating activities		185700

Investing activities:
Sale of equipment	15100
Purchase of investments	(117000)
Purchase of PP&E	(27500)
Net cash used in investing activities		(129400)
Financing activities:
Long term liabilities paid	(34000)
Proceeds from common stock issue	31000
Dividends paid	(22300)
Net cash used in financing activities		(25300)
Net increase in cash		31000
Beginning cash balance		20500
Ending cash balance		51500

2. Cash flows from operating activities is $185700. It means that the company generated positive cash flows.

Cash flows from investing activities is ($129400). It means that the company generated negative cash flows. Large amount of cash is invested on purchasing the PP&E and investments.

Cash flows fr financing activities is also negative. Company repaid its long term liabilities. Also some dividend is paid in 2017.