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 and cash equivalents	$	61,000		$	72,650
Accounts receivable		51,200			55,000
Inventory		68,700			62,500
Total current assets		180,900			190,150
Property, plant, and equipment		186,000			175,000
Less accumulated depreciation		62,000			43,750
Net property, plant, and equipment		124,000			131,250
Total assets	$	304,900		$	321,400
Accounts payable	$	40,000		$	71,200
Income taxes payable		31,200			36,700
Bonds payable		75,000			62,500
Common stock		87,500			75,000
Retained earnings		71,200			76,000
Total liabilities and stockholders’ equity	$	304,900		$	321,400

During the year, Ravenna paid a $7,500 cash dividend and it sold a piece of equipment for $3,750 that had originally cost $7,800 and had accumulated depreciation of $5,200. The company did not retire any bonds or repurchase any of its own common stock during the year.

Please answer all questions

7-a. What is the combined amount and direction (+ or −) of the inventory and accounts payable adjustments to net income in the operating activities section of the statement of cash flows?

7-b. What does this amount represent?

8-a. If the company debited income tax expense and credited income taxes payable $910 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?

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?

13. What is the company’s net cash provided by (used in) investing activities?

14. What is the amount of gross cash inflows reported in the financing section of the company’s statement of cash flows?

15. What is the company’s net cash provided by (used in) financing activities?

Answer 1

7a.
Increase in inventory (62500-68700)	-$6,200.00
Decrease in accounts payable (40,000-71200)	-$31,200.00
Combined amount and direction (+ or -)	-$37,400.00
7b.
This amount represents cash outflow as cash payment to supplier for purchases is more than purchases made.
8a Total debits recorded=$6410
8b These debits represent cash paid to reduce the income tax outstanding	$           6,410.00
9a Decrease in income tax payable = 36,700-31200= -5500
Adjustment to reconcile net income to net cash flow from operating activities
Decrease in income tax payable	-5,500
9b)
So this adjustment represent cash outflow from Cash paid for income tax..
10. Adjustment to reconcile net income to net cash flow from operating activities
Gain on sale of equipment(Note-2)	-1150
Particulars	Details	Amount
11. Cash Flow from Operating Activities:
Net Income(71200-76000+7500)		$    2,700.00
Adjustments to reconcile net income to cash flow from operating activities:
Depreciation(Note-3)	$    23,450.00
Gain on sale Of operational Assets	$     (1,150.00)
Decrease in Accounts Receivables (55000-51200)	$      3,800.00
Increase in Inventory	$     (6,200.00)
Decrease In Accounts Payable	$   (31,200.00)
Decrease in Income Tax Payable (36700-31200)	$     (5,500.00)	$ (16,800.00)
Net cash provided by (used in) operating activities		$ (14,100.00)
12. Amount of gross cash outflows reported in the investing section(Note -2)	$         18,800.00
Particulars	Details	Amount
13. Cash Flow from Investing Activities:
Addition of Property, plant, and equipment(note-2)	$   (18,800.00)
Proceeds from sale of Equipment(note-2)	$3,750.00
Net cash provided by (used in) investing activities		$ (15,050.00)
14. Amount of gross cash inflows reported in the financing section
Issuance Bonds payable(75000-62500)	$    12,500.00
Issuance of common stock($87500-$75000)	$    12,500.00
	$    25,000.00
15. Cash Flow from Financing Activities:
Issuance Bonds payable(75000-62500)	$    12,500.00
Cash Dividend	$     (7,500.00)
Issuance of common stock($87500-$75000)	$    12,500.00
Net cash provided by (used in) financing activities		$ 17,500.00

Note-1
Income tax payable A/c
Particulars	Debit	Particulars	Credit
To Cash	$6,410.00	By Balance B/f	$36,700.00
By Balance C/F	$31,200.00	By income taxes payable	$910.00
Total	$37,610.00		$37,610.00
Note-2
Property, plant, and equipment
Particulars	Debit	Particulars	Credit
To Balance B/f	$175,000	By Cash(Sale)	$3,750
To Gain On Sale	$1,150	By Accumulated depreciation A/c	$5,200
To Purchase	$18,800	By Balance C/F	$186,000
Total	$194,950		$194,950
Note-3
Accumulated depreciation A/c
Particulars	Debit	Particulars	Credit
To Property, plant, and equipment	$5,200.00	By Balance B/f	$43,750.00
To Balance C/F	$62,000.00	By Depreciation	$23,450.00
Total	$67,200.00		$67,200.00