Question

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	$	35			$	134
Accounts receivable		200				143
Prepaid insurance		5				3
Inventory		307				186
Buildings and equipment		422				361
Less: Accumulated depreciation		(130	)			(251	)
	$	839			$	576
Liabilities
Accounts payable	$	98			$	122
Accrued liabilities		4				9
Notes payable		61				0
Bonds payable		173				0
Shareholders’ Equity
Common stock		411				411
Retained earnings		92				34
	$	839			$	576

RED, INC. Statement of Income For Year Ended December 31, 2021
($ in millions)
Revenues
Sales revenue				$	2,110
Expenses
Cost of goods sold	$	1,424
Depreciation expense		41
Operating expenses		526			1,991
Net income				$	119

Additional information from the accounting records:

1. During 2021, $241 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 $61 million, it was necessary for Red to borrow $61 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

RED INC.				Workings:
Statement of Cash Flow				Calculation :
For Year Ended December 31, 2021 ($ in millions)				Cash collected from customers
Cash Flow from Operating Activities				Beginning Accounts receivable	143
Cash inflows:				+ Sales	2,110
Receipts form customers	2,053			- Ending Accounts receivable	(200)
Cash outflows:					2,053
Payment to suppliers	(1,569)
Payment for other expenses	(533)			Purchase from suppliers
(526 + 5 - 3 + 9 - 4)				- Beginning Inventory	(186)
Net cash flows from operating activities		(49)		+ cost of goods sold	1,424
Cash Flow from Investing activities				+ Ending Inventory	307
Sale of equipment	18				1,545
Purchase of equipment	(241)
				Cash paid for suppliers
Net cash Flow from Investing activities		(223)		Beginning Accounts payable	122
Cash Flow from Financing activities				+ purchase from suppliers	1,545
Issuance of bonds payable	173			- Ending Accounts payable	(98)
Issuance of note payable	61				1,569
Payment of dividends	(61)
Net cash Flow from Financing activities		173
Net increase (decrease) in cash		(99)
Cash balance, January 1		134
Cash balance, December 31		35