Question

A comparative statement of financial position for Sheffield Industries Inc. follows:

SHEFFIELD INDUSTRIES INC. Statement of Financial Position December 31, 2020
	December 31
Assets	2020			2019
Cash	$22,500			$35,500
Accounts receivable	117,000			55,300
Inventory	231,000			199,000
Land	86,000			130,000
Equipment	278,000			204,000
Accumulated depreciation—equipment	(70,500	)		(42,900	)
Total	$664,000			$580,900
Liabilities and Shareholders’ Equity
Accounts payable	$52,700			$60,200
Bonds payable	164,400			218,400
Common shares	234,000			180,000
Retained earnings	212,900			122,300
Total	$664,000			$580,900

Additional information:

1.		Net income for the fiscal year ending December 31, 2020, was $142,000.
2.		Cash dividends of $51,400 were declared and paid. Dividends paid are treated as financing activities.
3.		Bonds payable amounting to $54,000 were retired through issuance of common shares.
4.		Land was sold at a gain of $3,000.
5.		No equipment was sold during the year.

(a) Prepare a statement of cash flows using the indirect method.

Answer 1

Solution

SHEFFIELD INDUSTRIES INC.
Cash Flow Statement
For the Year Ended December 31, 2020
Cash Flow from Operating Activities:
Net Income		$     142,000.00
Adjustments to reconcile net income to net cash flow from operating activities
Gain on sale of land	$       (3,000.00)
Depreciation expense	$       27,600.00
Changes in current operating assets and liabilities:
Decrease in accounts payable	$       (7,500.00)
Increase in Accounts receivables	$     (61,700.00)
Increase in Inventory	$     (32,000.00)
		$     (76,600.00)
A. Cash Flow from Operating Activities		$       65,400.00
Cash Flow from Investing Activities:
Sale of land
Cash paid for Purchase of Equipment	$     (74,000.00)
Cash received on Sale of land	$       47,000.00
B. Cash flow from Investing Activities		$     (27,000.00)
Cash Flow from Financing Activities:
Repayment of long term notes payable
Dividend paid	$     (51,400.00)
C. Cash Flow from Financing Activities		$     (51,400.00)
Increase (Decrease) in cash [A+B+C]		$     (13,000.00)
Add: cash at the beginning of the year		$       35,500.00
Cash at the end of the year		$       22,500.00

Retiring of bonds in exchange on common stock will not be shown on cash flow statement as it is a non cash transaction.

.General notes for cash flow
Cash is increased when Current liability increase or Current asset Decrease.
Cash is Decreased when Current liability Decrease or Current asset Increase.
Depreciation or loss on sale of any asset is a non cash expense hence it will be added to net income to get operating cash
Profit on sale of asset or investment is a non cash profit and hence will be deducted from operating income.