Question

41-44

Ravenna Company is a merchandiser that uses the indirect method to prepare the operating activities section of its statement of cash flows. Its balance sheet for this year is as follows:

	Ending Balance			Beginning Balance
Cash	$	64,400		$	76,900
Accounts receivable		53,200			57,200
Inventory		71,400			65,000
Total current assets		189,000			199,100
Property, plant, and equipment		192,000			182,000
Less accumulated depreciation		64,000			45,500
Net property, plant, and equipment		128,000			136,500
Total assets	$	317,000		$	335,600
Accounts payable	$	41,600		$	74,000
Income taxes payable		32,400			39,600
Bonds payable		78,000			65,000
Common stock		91,000			78,000
Retained earnings		74,000			79,000
Total liabilities and stockholders’ equity	$	317,000		$	335,600

During the year, Ravenna paid a $7,800 cash dividend and it sold a piece of equipment for $3,900 that had originally cost $8,400 and had accumulated depreciation of $5,600. The company did not retire any bonds or repurchase any of its own common stock during the year.

1. What is the amount of the net increase or decrease in cash and cash equivalents that would be shown on the company’s statement of cash flows?

2. What net income would the company include on its statement of cash flows?

3. How much depreciation would the company add to net income on its statement of cash flows?

4-a. If the company debited Accounts Receivable and credited Sales for $780,000 during the year, what is the total amount of credits recorded in Accounts Receivable during the year?

4-b. What does the amount of these credits represent?

Answer 1

2) Calculation of Net Income:

Net Income/loss of the year transferred to the retained earnings can be calculated using the basic accounting equation or retained earnings T-account as follow;

Opening Balance + Credits – Debits = Ending Balance

79,000 + Credit – 7,800 = 74,000

Credit = 74,000 + 7,800 – 79,000 = $2,800

"OR"

Retained Earnings
Details	$	Details	$
Dividends	7800	Opening Balance	79000
Closing Balance	74000	Net Income (Bal Fig)	2800
	81800		81800

So, net income to be included in statement of cash flows is $2,800

3) Calculation of Annual Depreciation:

In same manner as in retained earnings, prepare T-account for Accumulated Depreciation:

Accumulated Depreciation
Details	$	Details	$
PPE- Asset Sold	5600	Opening Balance	45500
Closing Balance	64000	Depreciation (Bal Fig)	24100
	69600		69600

Depreciation $24,100 to be added to the net income.