Concept explainers
Statement of cash flows; indirect method
• LO4–8
Presented below are the 2018 income statement and comparative balance sheets for Santana Industries.
SANTANA INDUSTRIES
Income Statement
For the Year Ended December 31, 2018 ($ in thousands)
Sales revenue | $14,250 | |
Service revenue | 3,400 | |
Total revenue | $17,650 | |
Operating expenses: | ||
Cost of goods sold | 7,200 | |
Selling | 2,400 | |
General and administrative | 1,500 | |
Total operating expenses | 11,100 | |
Operating income | 6,550 | |
Interest expense | 200 | |
Income before income taxes | 6,350 | |
Income tax expense | 2,500 | |
Net income | $ 3,850 | |
Balance Sheet Information ($ in thousands) | Dec. 31, 2018 | Dec. 31, 2017 |
Assets: | ||
Cash | $ 7,350 | $ 2,200 |
Accounts receivable | 2,500 | 2,200 |
Inventory | 4,000 | 3,000 |
Prepaid rent | 150 | 300 |
Plant and equipment | 14,500 | 12,000 |
Less: |
(5,100) | (4,500) |
Total assets | $23,400 | $15,200 |
Liabilities and shareholders’ equity: | ||
Accounts payable | $ 1,400 | $ 1,100 |
Interest payable | 100 | 0 |
Deferred service revenue | 800 | 600 |
Income taxes payable | 550 | 800 |
Loan payable (due 12/31/2020) | 5,000 | 0 |
Common stock | 10,000 | 10,000 |
Retained earnings | 5,550 | 2,700 |
Total liabilities and shareholders’ equity | $23,400 | $15,200 |
Additional information for the 2018 fiscal year ($ in thousands):
1. Cash dividends of $1,000 were declared and paid.
2. Equipment costing $4,000 was purchased with cash.
3. Equipment with a book value of $500 (cost of $1,500 less accumulated depreciation of $1,000) was sold for $500.
4. Depreciation of $1,600 is included in operating expenses.
Required:
Prepare Santana Industries’ 2018 statement of cash flows, using the indirect method to present cash flows from operating activities.
Statement of Cash Flow:
The statement of cash flows is one of the financial statements, which provides information about cash inflows and cash outflows of an enterprise’s operating, investing, and financing activities that occurred during the period.
To prepare: Statement of Cash Flow of S Industries for the period ended December 31, 2018.
Explanation of Solution
Prepare Statement of Cash Flows of S Industries for the period ended December 31, 2018
S Industries | ||
Statement of Cash Flows | ||
For the period ending December 31, 2018 | ||
($ in thousands) | ||
Amount in $ | Amount in $ | |
Cash flows from operating activities: | ||
Net income | 3,850 | |
Adjustments for non cash items: | ||
Depreciation | 1,600 | |
Cash flows before changes in working capital | 5,450 | |
Changes in working capital: | ||
Increase in accounts receivable (a) | (300) | |
Increase in inventory (b) | (1,000) | |
Decrease in prepaid rent (c) | 150 | |
Increase in accounts payable (d) | 300 | |
Increase in interest payable (e) | 100 | |
Increase in deferred service revenue (f) | 200 | |
Decrease in income tax payable (g) | (250) | (800) |
Net Cash flows from operating activities (1) | 4,650 | |
Cash flows from investing activities: | ||
Purchase of equipment | (4,000) | |
Sale of equipment | 500 | |
Net Cash flows from investing activities (2) | (3,500) | |
Cash flows from financing activities: | ||
Loan payable | 5,000 | |
Payment of dividends | (1,000) | |
Net Cash flows from financing activities (3) | 4,000 | |
Net increase in cash and cash equivalents | 5,150 | |
Cash and cash equivalents on January 1, 2018 | 2,200 | |
Cash and cash equivalents on December 31, 2018 | 7,350 |
Table (1)
- Increase in current assets and decrease in current liabilities causes cash outflows.
- Increase in current liabilities and decrease in current assets causes cash inflows.
- Payment of dividend is a financing activity and causes cash outflow.
- Purchase of equipment is an investing activity and causes cash outflow.
- Sale of equipment is an investing activity and causes cash inflow.
- Depreciation is a non cash expense, added back to net income.
Working notes:
- (a) Compute changes in accounts receivables:
- (b) Compute changes in inventory:
- (c) Changes in the prepaid rent:
- (d) Changes in accounts payable:
- (e) Changes in interest payable:
- (f) Changes in deferred service revenue:
- (g) Changes in income taxes payable:
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