Question

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

Comparative balance sheets for 2021 and 2020, a statement of income for 2021, and additional information from the accounting records of Red, Inc., are provided below.

RED, INC. Comparative Balance Sheets December 31, 2021 and 2020 ($ in millions)
	2021				2020
Assets
Cash	$	42			$	138
Accounts receivable		194				150
Prepaid insurance		14				8
Inventory		300				193
Buildings and equipment		436				368
Less: Accumulated depreciation		(137	)			(258	)
	$	849			$	599
Liabilities
Accounts payable	$	105			$	136
Accrued liabilities		13				21
Notes payable		68				0
Bonds payable		144				0
Shareholders’ Equity
Common stock		418				418
Retained earnings		101				24
	$	849			$	599

RED, INC. Statement of Income For Year Ended December 31, 2021
($ in millions)
Revenues
Sales revenue				$	2,180
Expenses
Cost of goods sold	$	1,468
Depreciation expense		41
Operating expenses		526			2,035
Net income				$	145

Additional information from the accounting records:

1. During 2021, $248 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 $68 million, it was necessary for Red to borrow $68 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

ANSWER:

Computation of cash received from customers
Particulars	Amount (In Million)
Beginning accounts receivables	$150
Add: Sales	$2,180
Less: Ending accounts receivables	$194
Cash received from customers	$2,136

Computation of cash paid for inventory
Particulars	Amount (In Million)
Cost of Goods Sold	$1,468
Add: Ending inventory	$300
Less: Beginning inventory	$193
Purchases made during the year	$1,575
Add: Opening accounts payable	$136
Less: Ending accounts payable	$105
Cash paid to supplier for inventory	$1,606

Computation of cash paid for Operating Expenses
Particulars	Amount (In Million)
Operating Expenses	$526
Add: Ending Prepaid Insurance	$14
Less: Beginning prepaid insurance	$8
Add: Beginning accrued expenses payable	$21
Less: Ending accrued expenses payable	$13
Cash paid for operating expenses	$540

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	$2,136
Cash paid to supplier for inventory	-$1,606
Cash paid for operating expenses	-$540
Net Cash used by operating activities		-$10
Cash flow from investing activities:
Cash received from sale of equipment ($180*10%)	$18
Cash paid for purchase of equipment	-$248
Net Cash used in investing activities		-$230
Cash flow from financing activities:
Proceed from bank loan	$68
Proceed from issue of bonds	$144
Cash paid for dividends	-$68
Net Cash used in financing activities		$144
Net Increase (Decrease) in Cash		-$96
Cash balance at the beginning of the year		$138
Cash balance at the end of the year		$42