Question

49-52

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.

9-a. What is the amount and direction (+ or −) of the income taxes payable adjustment to net income in the operating activities section of the statement of cash flows?

9-b. What does this adjustment represent?

10. Would the operating activities section of the company’s statement of cash flows contain an adjustment for a gain or a loss? What would be the amount and direction (+ or ̶ ) of the adjustment?

11. What is the amount of net cash provided by (used in) operating activities in the company’s statement of cash flows?

12. What is the amount of gross cash outflows reported in the investing section of the company’s statement of cash flows?

Answer 1

Solution

Ravenna Company

9-a. determination of the amount and direction of the income taxes payable adjustment to net income in the operating activities section of the statement of cash flows:

For the indirect method the income taxes payable adjustment to net income in the operating activities section of the statement of cash flows is a deduction of $7,200 (39,600 – 32,400 = 7,200).

Income taxes payable adjustment to net income in the operating activities section of the statement of cash flows – ($7,200)

Explanation: income taxes payable is a current liability.

A decrease in current liability indicates that the payment for income tax payable is more than the income tax expense.

9-b. The decrease in income tax payable (current liability) decreases the net cash flow from operating activities. Hence, in indirect method the adjustment to net income in the operating activities section of the statement of cash flows is a deduction of $7,200 (39,600 – 32,400 = 7,200)

Q10. Yes, the operating activities section of the company’s statement of cash flow contains an adjustment for a gain or loss. The amount and direction of the adjustment is as follows,

Amount and direction – ($1,100)

The gain on sale of equipment $1,100 is reduced from the net income under the operating activities section.

Explanation and computations –

The gain on sale would be treated as part of revenue, hence increases the net income in the income statement. However, the gain does not actually indicate the movement of cash, hence the same is reduced as an adjustment to net income the operating activities section of the cash flow statement.

Gain on sale of equipment –

Book value of equipment = 8,400 – 5,600 = 2,800

Gain on sale = 3,900 – 2,800 = $1,100

11. the amount of net cash provided by (used in) operating activities in the company’s statement of cash flows -

Net cash used in operating activities in the company’s statement of cash flows = ($25,800)

Computations:

Computations –

Net income –

Retained earnings ending balance $74,000

Add: dividends paid   $7,800

Sub-total $81,800

Less: retained earnings beg balance $79,000

Net income $2,800

12. Amount of gross cash outflows reported in the investing section of the company’s statement of cash flow –

Gross outflows in the investing section = $18,400

There is an outflow of cash $18,400 for purchase of equipment in the investing section of the company’s statement of cash flows.

Computations –

Property, Plant & Equipment

Beg. Balance $182,000

Less: cost of equipment sold $8,400

Net amount = $173,600

Less: ending balance $192,000

Cost of equipment purchased $18,400

Hence, gross outflows in the investing section = $18,400

There is an outflow of cash $18,400 for purchase of equipment in the investing section of the company’s statement of cash flows.