Question

Comparative balance sheets for 2018 and 2017, a statement of income for 2018, and additional information from the accounting records of Red, Inc., are provided below.

RED, INC. Comparative Balance Sheets December 31, 2018 and 2017 ($ in millions)
	2018				2017
Assets
Cash	$	39			$	95
Accounts receivable		228				147
Prepaid insurance		10				5
Inventory		240				201
Buildings and equipment		430				375
Less: Accumulated depreciation		(134	)			(255	)
	$	813			$	568
Liabilities
Accounts payable	$	102			$	130
Accrued expenses payable		9				18
Notes payable		65				0
Bonds payable		169				0
Shareholders’ Equity
Common stock		415				415
Retained earnings		53				5
	$	813			$	568

RED, INC. Statement of Income For Year Ended December 31, 2018
($ in millions)
Revenues
Sales revenue				$	2,150
Expenses
Cost of goods sold	$	1,445
Depreciation expense		32
Operating expenses		560			2,037
Net income				$	113

Additional information from the accounting records:

1. During 2018, $235 million of equipment was purchased to replace $180 million of equipment (85% depreciated) sold at book value.
2. In order to maintain the usual policy of paying cash dividends of $65 million, it was necessary for Red to borrow $65 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

Solution:

Computation of cash received from customers
Particulars	Amount
Beginning accounts receivables	$147.00
Add: Revenues	$2,150.00
Less: Ending accounts receivables	$228.00
Cash received from customers	$2,069.00

Computation of cash paid for inventory
Particulars	Amount
Cost of Goods Sold	$1,445.00
Add: Ending inventory	$240.00
Less: Beginning inventory	$201.00
Purchases made during the year	$1,484.00
Add: Opening accounts payable	$130.00
Less: Ending accounts payable	$102.00
Cash paid to supplier for inventory	$1,512.00

Computation of cash paid for Operating expenses
Particulars	Amount
Operating expenses	$560.00
Add: Beginning accured expenses payable	$18.00
Less: Ending accured expenses payable	$9.00
Add: Ending prepaid insurance	$10.00
Less: Beginning prepaid insurance	$5.00
Cash paid for operating expenses	$574.00

Red Inc.
Statement of Cash Flows (Direct Method)
For Year Ended December 31, 2018
Particulars	Details	Amount (In millions)
Cash Flows from operating activities:
Cash Inflows:
Cash received from customers	$2,069.00
Cash Outflows:
Cash paid to supplier for inventory	-$1,512.00
Cash paid for Operating expenses	-$574.00
Net Cash flow from operating activities		-$17.00
Cash flow from investing activities:
Cash received from sale of equipment	$27.00
Cash paid to purchase of equipment	-$235.00
Net Cash used in investing activities		-$208.00
Cash flow from financing activities:
Borrowings from bank	$65.00
Proceed from issue of bond	$169.00
Dividend paid	-$65.00
Net Cash used in financing activities		$169.00
Net Increase (Decrease) in Cash		-$56.00
Cash balance at beginning of year		$95.00
Cash balance at end of year		$39.00