Question

Exercise 21-27 Statement of cash flows; direct method [LO21-3, 21-5, 21-6, 21-8]

Comparative balance sheets for 2018 and 2017, a statement of income for 2018, and additional information from the accounting records of Red, Inc., are provided below.

RED, INC. Comparative Balance Sheets December 31, 2018 and 2017 ($ in millions)
	2018				2017
Assets
Cash	$	35			$	134
Accounts receivable		200				143
Prepaid insurance		5				3
Inventory		307				186
Buildings and equipment		422				361
Less: Accumulated depreciation		(130	)			(251	)
	$	839			$	576
Liabilities
Accounts payable	$	98			$	122
Accrued expenses payable		4				9
Notes payable		61				0
Bonds payable		173				0
Shareholders’ Equity
Common stock		411				411
Retained earnings		92				34
	$	839			$	576

RED, INC. Statement of Income For Year Ended December 31, 2018
($ in millions)
Revenues
Sales revenue				$	2,110
Expenses
Cost of goods sold	$	1,424
Depreciation expense		41
Operating expenses		526			1,991
Net income				$	119

Additional information from the accounting records:

1. During 2018, $241 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 $61 million, it was necessary for Red to borrow $61 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

Computation of cash received from customers
Particulars	Amount (In Million)
Beginning accounts receivables	$143
Add: Sales	$2,110
Less: Ending accounts receivables	$200
Cash received from customers	$2,053

Computation of cash paid for inventory
Particulars	Amount (In Million)
Cost of Goods Sold	$1,424
Add: Ending inventory	$307
Less: Beginning inventory	$186
Purchases made during the year	$1,545
Add: Opening accounts payable	$122
Less: Ending accounts payable	$98
Cash paid to supplier for inventory	$1,569

Computation of cash paid for Operating Expenses
Particulars	Amount (In Million)
Operating Expenses	$526
Add: Ending Prepaid Insurance	$5
Less: Beginning prepaid insurance	$3
Add: Beginning accrued expenses payable	$9
Less: Ending accrued expenses payable	$4
Cash paid for operating expenses	$533

Red Inc.
Statement of Cash Flows
For Year Ended December 31, 2018
Particulars	Details	Amount (In Million)
Cash Flows from operating activities:
Cash received from customers	$2,053
Cash paid to supplier for inventory	-$1,569
Cash paid for operating expenses	-$533
Net Cash used by operating activities		-$49
Cash flow from investing activities:
Cash received from sale of equipment ($180*10%)	$18
Cash paid for purchase of equipment	-$241
Net Cash used in investing activities		-$223
Cash flow from financing activities:
Proceed from bank loan	$61
Proceed from issue of bonds	$173
Cash paid for dividends	-$61
Net Cash used in financing activities		$173
Net Increase (Decrease) in Cash		-$99
Cash balance at the beginning of the year		$134
Cash balance at the end of the year		$35

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