Question

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	$	126,600		$	152,250
Accounts receivable		100,000			107,800
Inventory		134,300			122,500
Total current assets		360,900			382,550
Property, plant, and equipment		354,000			343,000
Less accumulated depreciation		118,000			85,750
Net property, plant, and equipment		236,000			257,250
Total assets	$	596,900		$	639,800
Accounts payable	$	78,400		$	139,200
Income taxes payable		60,800			83,100
Bonds payable		147,000			122,500
Common stock		171,500			147,000
Retained earnings		139,200			148,000
Total liabilities and stockholders’ equity	$	596,900		$	639,800

During the year, Ravenna paid a $14,700 cash dividend and it sold a piece of equipment for $7,350 that had originally cost $17,400 and had accumulated depreciation of $11,600. The company did not retire any bonds or repurchase any of its own common stock during the year.

6-a. If the company debited cost of goods sold and credited inventory for $980,000 during the year, what is the total amount of inventory purchases recorded on the debit side of the Inventory T-account and the credit side of the Accounts Payable T-account?

6-b. What is the total amount of the debits recorded in the Accounts Payable T-account during the year?

6-c. What does the amount of these debits represent?

8-a. If the company debited income tax expense and credited income taxes payable $1,870 during the year, what is the total amount of the debits recorded in the Income Taxes Payable account?

8-b. What does the amount of these debits represent?

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?

Answer 1

6 a) Inventory A/C

Particular	Amount	Particular	Amount
Beginning balance	122500	Cost of goods sold	980000
Accounts payable (b.f)	991800	Ending Balance	134300
Total	1114300	Total	1114300

So Current year purchase of inventory is 991800. Same will be credited to Accounts payable Account. The journal entry will be

Inventory a/c Dr 991800

To Accounts Payable a/c 991800

6 b) Accounts Payable Account

Particular	Amount	Particular	Amount
Cash (b.f)	1052600	Beginning balance	139200
Ending balance	78400	Inventory purchase	991800
Total	1131000	Total	1131000

So total amount of debit recorded in accounts payable account is 1052600

6 c) Debit side of Accounts payable account represent current year cash payment to it's creditors. It will reduce the accounts payable balance. Debit side of inventory account represent purchase of inventory, it will increase the inventory value

8 a) Income Tax payable Account

Particular	Amount	Particular	Amount
Cash (b.f)	24170	Beginning balance	83100
Ending balance	60800	Income tax expenses	1870
Total	84970	Total	84970

So total amount of debit recorded Income tax payable  account is 24170

8 b) It represent current year cash payment to income tax department.It will reduce Income tax payable balance.

9 a) Cash flow statement only record cash transactions. Here company uses indirect method to prepare operating activity section. It reconcile net income to net cash flow. Here Current year income tax expense is add back to Net income i.e. 1870 add back to net income to find out earnings before tax (or to reconcile net income). And then subtract current year cash payment to income tax department. i.e. 24170 is subtracted from Earnings before tax. Because this is the actual cash outflow transaction

9 b) This adjustment represent cash outflow of operating activity.

10) The gain or loss from sale of property included in net income. But this is not an operating activity. It included in investing activity section calculation. so it must deduct from net income in case of gain or add back to net income  in case of loss for reconcile the net income to net cashflow from operating activity

In our case

Cost of Property = 17400

Accumulated Depreciation = 11600

Net book value = Cost of Property - Accumulated Depreciation

17400 - 11600 = 5800

proceeds from sale = 7350

Gain or (Loss) = proceed from sale-  Net book value  

= 7350 - 5800 = 1550

So 1550 must deduct from net income.

Here proceeds from sale of property 7350 shows in investing activity section of cash flow statement as cash inflow. It include both book value and Gain.