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

Please refer T account for working notes

A Cash flow statement is an important part of the financial statements published by reporting firms. A Cash flow statement summarizes the movement of cash from opening balance to closing balance and understanding whether movement is due to operating, investing and financial activity. Most of the regulatory requirements today have made Cash flow statement mandatory to publish along with its Financial Statements. A Cash flow statement can help shareholders in making informed decisions regarding their investments.

Uses of Cash Flow Statement:

• Helps in understanding the financial cash position of the firm
• Helps in arranging finance based on the forecast of cash flow
• Helps in taking short term decisions regarding financial requirements
• Helps in managing cash which is pivotal to any business
• Helps in understanding working capital movement due to operating activities
• Helps in raising capital and making investment decisions