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 and cash equivalents	$	89,000		$	106,750
Accounts receivable		71,500			77,000
Inventory		96,000			87,500
Total current assets		256,500			271,250
Property, plant, and equipment		255,000			245,000
Less accumulated depreciation		85,000			61,250
Net property, plant, and equipment		170,000			183,750
Total assets	$	426,500		$	455,000
Accounts payable	$	56,000		$	99,500
Income taxes payable		43,500			57,000
Bonds payable		105,000			87,500
Common stock		122,500			105,000
Retained earnings		99,500			106,000
Total liabilities and stockholders’ equity	$	426,500		$	455,000

During the year, Ravenna paid a $10,500 cash dividend and it sold a piece of equipment for $5,250 that had originally cost $12,000 and had accumulated depreciation of $8,000. The company did not retire any bonds or repurchase any of its own common stock during the year.

6-a. If the company debited cost of goods sold and credited inventory for $700,000 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?

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

6-c. What does the amount of these debits represent?

7-a. What is the combined amount and direction (+ or −) of the inventory and accounts payable adjustments to net income in the operating activities section of the statement of cash flows?

7-b. What does this amount represent?

8-a. If the company debited income tax expense and credited income taxes payable $1,300 during the year, what is the total amount of the debits recorded in the Income Taxes Payable account?

8-b. What does the amount of these debits represent?

Answer 1

Solution 6a:

Amount of inventory purchases during the year = Cost of goods sold + Ending inventory - Beginning inventory

= $700,000 + $96,000 - $87,500 = $708,500

Solution 6b:

Total amount of the debits recorded in the Accounts Payable T-account during the year = Beginning accounts payable + Purchases - Ending accounts payable

= $99,500 + $708,500 - $56,000 = $752,000

Solution 6c:

This debit represents payments made to supplier during the year.

Solution 7a:

Combined amount and direction (+ or −) of the inventory and accounts payable adjustments to net income in the operating activities section of the statement of cash flows:

Amount = Increase in inventory + Decrease in accounts payable = ($96,000 - $87,500) + ($99,500 - $56,000) = $52,000

Direction = - (Negative)

Solution 7b:

This amount represents increase in inventory and decrease in accounts payable resulting in cash outflow.

Solution 8a:

Total amount of the debits recorded in the Income Taxes Payable account = Beginning income tax payable + Income tax expense - Ending income tax payable

= $57,000 + $1,300 - $43,500 = $14,800

Solution 8b:

The amount of these debit represent payment of income taxes for the year.