Assignment 5-23 (Indirect Method) Page 249 & 250
LAURENT COMPANY
Statement of Cash Flow
for the year ended 31 December 20x8
Operations
Net income $156,000 Step 2
Plus (less) non-cash items
Depreciation 12,000 Step 3
168,000
Plus (less) changes to working capital Step 4
Decrease in accounts receivable 3,000
Increase in inventory (15,000)
Increase in accounts payable 18,000
Cash from operations $174,000
Financing activities Step 5
Increase in short-term bank loan 3,000
Issued common shares for cash* 66,000
Paid cash dividend ($24,000 + $156,000) vs $72,000 (108,000) (39,000)
Investing activities Step 6
Sold long-term investment 9,000
Paid cash for capital assets (27,000) ( 18,000)
Net change in cash 117,000 Step 1
Opening cash ( 15,000)
Closing cash $102,000
* $24,000 non-cash issuance to retire long-term debt is not shown on the CFS.
$150,000 + $24,000 = $174,000 vs. $240,000
Steps:
Steps 1 to 4: Operating Section
Step 1: determine change in cash & cash equivalents for the year
December 31, 20x7 balance $-15,000
December 31, 20x8 balance $102,000
Net change for year increase of $117,000
Step 2: start with Net Income from Income Statement $156,000
Step 3: add back non-cash items (depreciation) $12,000
Step 4: analyze changes to working capital (current assets & current liabilities)
- accounts receivable decreased $3,000
- inventory increased by $15,000
- accounts payable increased by $18,000
Step 5: Financing section – any changes in capital structure (equity accounts)?
i) common shares increased $90,000
- a) the question told us that they paid $24,000 on the long-term note payable
by issuing common shares. Even exchange.
Journal entry would be:
dr Long-term Note Payable $24,000
cr Common shares $24,000
Entry does not affect Cash Flow statement due to the non-use of cash.
Increase in common shares $90,000
increase due to exchange for reduction in note -24,000
Unreconciled increase in common shares $66,000
ii) Must have issued common shares for cash to account for the unreconciled increase in common shares of $66,000
Journal entry:
dr Cash 66,000
cr Common Shares 66,000
Record increase of cash of $66,000 as a Financing activity for common shares issued.
***Note: The Note Payable account was decreased by $24,000 by this transaction. Keep that in mind when reconciling the change in the Note Payable account.***
iii) retained earnings increased by $48,000
Net income for the year was $156,000
retained earnings only increased 48,000
Unreconciled difference $108,000
Must have paid dividends to shareholders during the year to explain the unreconciled decrease in Retained Earnings.
Journal entry created when dividends are paid out:
dr Retained Earnings 108,000
cr Cash 108,000
Need to record a decrease of Cash of $108,000 as a Financing activity for dividends paid.
iv) increase in short-term bank loan of $3,000
The company must have borrowed $3,000 more cash from the bank.
Journal entry:
dr Cash $3,000
cr Short-term loan payable $3,000
Need to record inflow of cash for $3,000 as a Financing activity
Step 6: Investing section – any changes in the asset structure of the company that hasn’t been explained yet? (affects capital assets and investments)
v) Capital assets increased by $99,000
Item b) states that the company purchased capital assets that cost $99,000, and they gave a $72,000 long-term note payable, and paid $27,000 cash.
Journal entry:
dr Capital assets 99,000
cr Cash 27,000
cr Note Payable, long-term 72,000
- Need to record cash part of the capital asset transaction. Paid $27,000 for capital assets.
- no need to record increase in Note Payable of $72,000 (non-cash).
This transaction explains the complete increase in the Capital assets account of $99,000, and an increase in the Note Payable account of $72,000.
Note payable, long-term increased by $48,000
Decrease of note due to $24,000 exchange of common shares 24,000 *ABOVE*
Unreconciled increase in Note Payable, long-term $72,000
Purchase of capital assets on credit (note) 72,000
Unreconciled increase in Note Payable, long-term 0
This transaction now explains the unreconciled increase in the Note Payable account, so the changes in the Notes Payable account are now reconciled.
vi) long-term investment decreased by $9,000
Item c) stated that the long-term investment was sold at cost for cash.
Since it was carried on the books for $9,000, we assume it was also sold for $9,000 cash.
Journal entry:
dr Cash 9,000
cr Investment, long-term 9,000
The cash inflow of $9,000 as a result of the sale gets recorded as an Investing activity.
- At this point, all changes in account balances from the Balance Sheet have been accounted for, and the changes in cash on the cash flow statement equal the actual change in Cash & Cash equivalents of $117,000 for the period.
- This Statement is now balanced and is complete.
Assignment 5-25 (Direct Method)
LAURENT COMPANY
Cash Flow Statement
for the year ended 31 December 20x8
Operations
Cash collected from customers ($900,000 + $3,000) $903,000
Cash paid to suppliers ($540,000 + $15,000 - $18,000) (537,000)
Cash paid for other expenses ( 192,000)
Cash from operations $174,000
Financing activities
Increase in short-term bank loan 3,000
Issued common shares for cash* 66,000
Paid cash dividend ($24,000 + $156,000) vs $72,000 (108,000) (39,000)
Investing activities
Sold long-term investment 9,000
Paid cash for capital assets (27,000) ( 18,000)
Net change in cash 117,000
Opening cash ( 15,000)
Closing cash $102,000
* $24,000 non-cash issuance to retire long-term debt is not shown on the CFS.
$150,000 + $24,000 = $174,000 vs. $240,000