Question

Ravenna Company is a merchandiser that uses the indirect method to prepare the operating activities section of its statement of cash flows. Its balance sheet for this year is as follows:

	Ending Balance			Beginning Balance
Cash	$	121,800		$	146,550
Accounts receivable		95,900			103,400
Inventory		128,800			117,500
Total current assets		346,500			367,450
Property, plant, and equipment		339,000			329,000
Less accumulated depreciation		113,000			82,250
Net property, plant, and equipment		226,000			246,750
Total assets	$	572,500		$	614,200
Accounts payable	$	75,200		$	133,500
Income taxes payable		58,300			80,200
Bonds payable		141,000			117,500
Common stock		164,500			141,000
Retained earnings		133,500			142,000
Total liabilities and stockholders’ equity	$	572,500		$	614,200

During the year, Ravenna paid a $14,100 cash dividend and it sold a piece of equipment for $7,050 that had originally cost $16,800 and had accumulated depreciation of $11,200. The company did not retire any bonds or repurchase any of its own common stock during the year.

a.What is the amount and direction (+ or −) of the accounts receivable adjustment to net income in the operating activities section of the statement of cash flows?

b.What does this adjustment represent?

c.If the company debited cost of goods sold and credited inventory for $940,000 during the year, what is the total amount of inventory purchases recorded on the debit side of the Inventory T-account and the credit side of the Accounts Payable T-account?

d.What is the total amount of the debits recorded in the Accounts Payable T-account during the year?

e.What does the amount of these debits represent?

Answer 1

Solution:

A).

Change in Account receivables = opening balance - closing balance

= $103400-$95,900

= $7,500

Change is decrease in Account receivables that means cash is collected from customer, that change is added i.e. (+) in cash flow.

  

(B).

By analysis that statement the conclusion is, in current year business make more cash sales as compared to previous years due to that their Account receivables reduced.

(C).

Amount debit in T-Account as purchase:

Cogs = beginning inventory + purchase - closing inventory

$940,000 = $117,500 + purchase - $95,900

Purchase = $726,600

(D)

Amount is debit from Account payables (AP):

Debit amount from AP= beginning AP - closing AP

= $133,500-$75,200

= $58,300

(E).

Amount of these debits represent payment of liability and purchase of inventory for business activity and these are represent outflow of cash while debit of cash at (a) represent increase of cash balance by crediting Accounts receivables.