Question

Alford Company and its 80 percent–owned subsidiary, Knight, have the following income statements for 2018: Alford Knight Revenues $ (500,000 ) $ (230,000 ) Cost of goods sold 300,000 140,000 Depreciation and amortization 40,000 10,000 Other expenses 20,000 20,000 Gain on sale of equipment (30,000 ) 0 Equity in earnings of Knight (36,200 ) 0 Net income $ (206,200 ) $ (60,000 )

Additional Information for 2018 Intra-entity inventory transfers during the year amounted to $90,000. All intra-entity transfers were downstream from Alford to Knight. Intra-entity gross profits in inventory at January 1 were $6,000, but at December 31, they are $9,000. Annual excess amortization expense resulting from the acquisition is $11,000. Knight paid dividends totaling $20,000. The noncontrolling interest's share of the subsidiary's income is $9,800. During the year, consolidated inventory rose by $11,000 while accounts receivable and accounts payable declined by $8,000 and $6,000, respectively.

Using either the direct or indirect method, compute net cash flows from operating activities during the period for the business combination.

Answer 1

Cash revenue = Book values – Intra entity transfers + Decrease in A/R

                       = (500000+230000)-90000+8000

                       = $648000

Cash inventory = Book values – Intra entity transfers – Beginning unrealized gains + Ending unrealized gains + Increase in inventory + Decrease in A/P

                         = (300000+140000)-90000-6000+9000+11000+6000

                         = $370000

Other expenses = 20000+20000

                         = $40000

Direct method = 648000-370000-40000

                        = $238000

The net cash flow using direct method is $238000

Revenues = 500000+230000-90000

= $640000

COGS = 300000+140000-90000-6000+9000

          = $353000

Amortization = 40000+10000+11000

                       = $61000

Consolidated net income = 640000-353000-61000-40000+30000

= $216000

From amounts determined above and given in problem, calculate indirect method

Indirect method = 216000+61000-30000-11000+8000-6000

  = $238000

The net cash flow using indirect method is same as direct method $238000