Question

1. Statement of Cash Flows—A method of reporting the cash flows from operating activities as the net income from operations adjusted for all deferrals of past cash receipts and payments and all accruals of expected future cash receipts and payments.Indirect Method

   List the errors you find in the following statement of cash flows. The cash balance at the beginning of the year was $240,000. All other amounts are correct, except the cash balance at the end of the year.

   Shasta Inc.
   Statement of Cash Flows
   For the Year Ended December 31, 20Y9
   Cash flows from operating activities:
   Net income			$360,000
   Adjustments to reconcile net income to net cash flow from operating activities:
   Depreciation			100,800
   Gain on sale of investments			17,280
   Changes in current operating assets and liabilities:
   Increase in accounts receivable			27,360
   Increase in inventories			(36,000)
   Increase in accounts payable			(3,600)
   Decrease in accrued expenses payable			(2,400)
   Net cash flow from operating activities					$463,440
   Cash flows from investing activities:
   Cash received from sale of investments			$240,000
   Cash paid for purchase of land			(259,200)
   Cash paid for purchase of equipment			(432,000)
   Net cash flow used for investing activities					(415,200)
   Cash flows from financing activities:
   Cash received from sale of common stock			$312,000
   Cash paid for dividends			(132,000)
   Net cash flow from financing activities					180,000
   Change in cash					$47,760
   Cash at the end of the year					192,240
   Cash at the beginning of the year					$240,000

   a. Answer the following questions. Use your answers to help you in locating errors for the above statement of cash flows.

   Item	Yes or No
   1. Depreciation should be added to net income.	Yes No
   2. Gain on sale of investments should be added to net income.	Yes No
   3. Increases in accounts payable should be deducted from net income.	Yes No
   4. Increases in accounts receivable should be added to net income.	Yes No
   5. Cash paid for property, plant, and equipment should be deducted under investing.	Yes No
   6. Cash received from sale of common stock should be added under financing.	Yes No

   b. Enter the corrected amounts below. Use the minus sign to indicate cash out flows, cash payments, decreases in cash, or any negative adjustments.

   Net cash flow from operating activities	$
   Net cash flow used for investing activities	$
   Net cash flow provided by financing activities	$

   c. Based on the corrected amounts above and the fact that the correct cash balance at the beginning of the year was $240,000, enter the corrected amounts for the increase in cash and the cash balance at the end of the year.

   Change in cash	$
   Cash at the end of the year	$

Answer 1

A.

1. yes
2. no
3. no
4. no
5. yes
6. yes

Cash flow statement:

CASH FLOW FROM OPERATING ACTIVITIES
Net Profit Before Tax		3,60,000
Adjustment for:-
Depreciation	1,00,800
Gain on sale of investments	-17280
Increase Trade Payables	3,600
Decrease in accrued expenses payable	-2,400
Increase in Inventories	-36,000
Increase Trade Receivables	-27,360
A. NET CASH FLOW FROM OPEARTING ACTIVITIES		21360
CASH FLOW FROM INVESTING ACTIVITES
Cash received from sale of investments	2,40,000
Cash paid for purchase of land	-2,59,200
Purchase of equipment	-4,32,000
B. NET CASH FLOW FROM INVESTING ACTIVITIES		-451200
CASH FLOW FROM FINANCING ACTIVITIES
Cash received from sale of common stock	3,12,000
Cash paid for dividends	-1,32,000
C. NET CASH FLOW FROM FINANCING ACTIVITIES		180000
NET INCREASE /DECREASE IN CASH AND CASH EQUIVALENTS		110160
CASH AND CASH EQUIVALENTS,at the beginning of the year		240000

CASH AND CASH EQUIVALENTS,at the end of the year

350160