Question

The comparative balance sheets for 2018 and 2017 are given below for Surmise Company. Net income for 2018 was $52 million.

SURMISE COMPANY Comparative Balance Sheets December 31, 2018 and 2017 ($ in millions)
	2018				2017
Assets
Cash	$	67			$	72
Accounts receivable		75				78
Less: Allowance for uncollectible accounts		(8	)			(3	)
Prepaid expenses		3				2
Inventory		158				150
Long-term investment		45				20
Land		70				70
Buildings and equipment		288				200
Less: Accumulated depreciation		(94	)			(80	)
Patent		10				12
	$	614			$	521
Liabilities
Accounts payable	$	4			$	13
Accrued liabilities		1				5
Notes payable		20				0
Lease liability		80				0
Bonds payable		50				90
Shareholders’ Equity
Common stock		55				50
Paid-in capital—excess of par		247				205
Retained earnings		157				158
	$	614			$	521

Prepare the statement of cash flows of Surmise Company for the year ended December 31, 2018. Use the indirect method to present cash flows from operating activities because you do not have sufficient information to use the direct method. You will need to make reasonable assumptions concerning the reasons for changes in some account balances. A spreadsheet or T-account analysis will be helpful. (Hint: The right to use a building was acquired with a seven-year lease agreement. Annual lease payments of $8 million are paid at January 1 of each year starting in 2018.)

Answer 1

Surmise company
Statement of cash flows
	$	$
Cash flows from operating activities
Net income	52
Adjustments:
Add: Depreciation	14
Add: Patent Amortization	2
Add: Bad debt expense	5
Add: Decrease in Accounts receivable	3
less: Increase in Prepaid expenses	-1
Less: Increase in inventory	-8
Less: Decrease in Accounts Payable	-9
Less: Decrease in Accrued liabilities	-4
Cash flows provided by operating activities		54
Cash flows from investing activities
Purchase of long term investment	-25
Cash flows provided by investing activities		-25
Cash flows from financing activities
Payment of lease	-8
Receipt of note payable	20
repayment of bond payable	-40
Dividend Paid($158-$157+$52M)	-53
Sale of common stock($5+$42)	47	-34
Net increase in cash		-5
cash in the beginning		72
cash at the end		67