Question

Part A: Ranier Ltd. has just completed its first year of operations on December 31, 20X1. Net income for the year was $570. During the year, equipment costing $800 was purchased when the company paid cash of $640 and issued common shares worth $160. Near the end of the year, equipment costing $60 with accumulated depreciation of $16 was sold for $54. At the end of the year, accounts receivable was $250, accounts payable was $36 and accumulated depreciation was $144. A bank loan of $140 was received during the year to help finance operations. At the end of the year, the bank had been paid $52 including $14 of interest. Based on the above information, please prepare the statement of cash flows for the year ended December 31, 20X1 using the indirect method.
Part B: How does the information in the statement of cash flows help the user of the financial statement?

Answer 1

Answer part A:

Cash Flow statement
Cash Flow from Operating Activties
Net Income	$         570
Depreciation	$         128
Interest paid	$            14
Gain on sale of equipment	$          (10)
Increase in accounts receivable	$        (250)
Increase in accounts payable	$            36
		$         488
Cash Flow from Investing Activties
Equipment purchased	$        (640)
Equipment sold	$            54
		$        (586)
Cash Flow from Financing Activities
Bank loan availed	$         140
Bank loan repayment	$          (52)
Interest paid	$          (14)
		$            74
Total cash Flows		$          (24)

Answer part B:

The information in cash flow statement helps the user to analyze the cash position of the company. It shows teh inflows and outflows of the cash and their sources.

It also segregates cash flows into three main activities-Operating, Investing and Financing.

The company has taken a bank loan and that's why the financing cash flows are positive.

Company's operating cash flows are also positive.

As this is the beginning year, the company has invested a huge amount on equipments, that's why investing cash flows are negative.

In case of any doubt, please feel free to comment.