Question

Comparative balance sheets for 2021 and 2020, a statement of income for 2021, and additional information from the accounting records of Red, Inc., are provided below.

RED, INC. Comparative Balance Sheets December 31, 2021 and 2020 ($ in millions)
	2021				2020
Assets
Cash	$	32			$	128
Accounts receivable		149				140
Prepaid insurance		8				4
Inventory		301				183
Buildings and equipment		416				358
Less: Accumulated depreciation		(127	)			(248	)
	$	779			$	565
Liabilities
Accounts payable	$	95			$	116
Accrued liabilities		7				12
Notes payable		58				0
Bonds payable		170				0
Shareholders’ Equity
Common stock		408				408
Retained earnings		41				29
	$	779			$	565

RED, INC. Statement of Income For Year Ended December 31, 2021
($ in millions)
Revenues
Sales revenue				$	2,060
Expenses
Cost of goods sold	$	1,457
Depreciation expense		41
Operating expenses		492			1,990
Net income				$	70

Additional information from the accounting records:

1. During 2021, $238 million of equipment was purchased to replace $180 million of equipment (90% depreciated) sold at book value.
2. In order to maintain the usual policy of paying cash dividends of $58 million, it was necessary for Red to borrow $58 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:
	Statement of Cash Flows - Direct Method
	© www.excel-skills.com	Amount
	Cash flows from operating activities
	Cash Receipts:
	Cash receipts from customers (Wn1)	$           2,051
	Cash Payments:
	Cash paid for Merchandise (WN2)	$         -1,596
	Cash Paid for Operating Expenses	$            -501
	Net cash from operating activities		$            -46
	Cash flows from investing activities
	Purchase of Equipment	$            -238
	Sale of Equipment ($ 180 X 10%)	$                18
	Net cash used in investing activities		$          -220
	Cash flows from financing activities
	Issue of Note Payable	$                58
	Issue of Bonds Payable	$              170
	Payment of cash dividend	$              -58
	Net cash used in financing activities		$           170
	Net increase in cash and cash equivalents		$            -96
	Cash and cash equivalents at beginning of period		$           128
	Cash and cash equivalents at end of period		$             32
	Working notes: 1
	Calculation of cash collection from customer
	Sales	$                 2,060
	Add: Opening AR	$                    140
	Less: Closing AR	$                    149
	Cash Collected	$                 2,051
	Working notes: 2
	Calculation of purhcase of inventory
	Cost of MErchandise Sold	$                 1,457
	Add: Closing inventory	$                    301
	Less : Opening Inventory	$                    183
	Material Purhcased	$                 1,575
	Calculation of amount paid to supplied
	Op. Balance of Acct Payable	$                    116
	Add: Purchases	$                 1,575
	Less: Cl. Balance of Account payable	$                       95
	Cash paid	$                 1,596
	Working notes: 3
	Calculation of amount paid for other operating expenses
	Operating Expenses	$                    492
	Add: Increase in prepaid Expenses	$                         4
	Add: Decrease in accrued liabilities	$                         5
	Net Cash Paid	$                    501