Question

The comparative balance sheets for 2018 and 2017 are given below for Surmise Company. Net income for 2018 was $76 million.

SURMISE COMPANY Comparative Balance Sheets December 31, 2018 and 2017 ($ in millions)
	2018				2017
Assets
Cash	$	22			$	31
Accounts receivable		87				102
Less: Allowance for uncollectible accounts		(23	)			(5	)
Prepaid expenses		18				14
Inventory		129				109
Long-term investment		122				85
Land		94				94
Buildings and equipment		386				260
Less: Accumulated depreciation		(131	)			(104	)
Patent		23				25
	$	727			$	611
Liabilities
Accounts payable	$	17			$	38
Accrued liabilities		1				18
Notes payable		44				0
Lease liability		116				0
Bonds payable		62				126
Shareholders’ Equity
Common stock		67				50
Paid-in capital—excess of par		257				205
Retained earnings		163				174
	$	727			$	611

Required:
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 $10 million are paid at January 1 of each year starting in 2018.) (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

Surmise Company
Statement of Cash Flows
For year ended December 31, 2018 ($ in millions)
Cash flows from operating activities:
Net income		$76
Adjustments for noncash effects:
Depreciation expense	27
Bad debt expense	18
Patent amortization expense	2
Changes in operating assets and liabilities:
Decrease in accounts receivable	15
Increase in inventory	-20
Decrease in accounts payable	-21
Increase in prepaid expenses	-4
Decrease in accrued liabilities	-17	0
Net cash flows from operating activities		$76
Cash flows from investing activities:
Purchase of long-term investment	-37
Net cash flows from investing activities		-37
Cash flows from financing activities:
Issuance of note payable	44
Retirement of bonds payable	-64
Sale of common stock	69
Annual Leae payment	-10
Payment of cash dividends	-87
Net cash flows from financing activities		-48
Net increase in cash		($9)
Cash balance, January 1		31
Cash balance, December 31		$22
Noncash investing and financing activities:
Acquired buildings by capital lease		$116
Working notes for the above answer is as under
Spreadsheet for the Statement of Cash Flows
	Dec.31		Changes		Changes	Dec. 31
	2018		Debits		Credits	2017
Balance Sheet
Assets:
Cash	22		9			31
Accounts receivable	87				15	102
Less: Allowance	-23				18	-5
Prepaid expenses	18		4			14
Inventory	129		20			109
Long-term investment	122		37			85
Land	94					94
Buildings and equip.	386		126			260
Less: Acc. depreciation	-131				27	-104
Patent	23				2	25
	727					611
Liabilities:
Accounts payable	17		21			38
Accrued liabilities	1		17			18
Notes payable	44				44	0
Lease liability	116				116	0
Bonds payable	62		64			126
Shareholders' Equity:
Common stock	67				17	50
Paid-in capital-ex. of par	257				52	205
Retained earnings	163		87		76	174
	727					611