Question

The comparative balance sheets for 2021 and 2020 are given below for Surmise Company. Net income for 2021 was $90 million.

SURMISE COMPANY Comparative Balance Sheets December 31, 2021 and 2020 ($ in millions)
	2021				2020
Assets
Cash	$	23			$	31
Accounts receivable		95				117
Less: Allowance for uncollectible accounts		(29	)			(4	)
Prepaid expenses		24				21
Inventory		128				110
Long-term investment		95				50
Land		110				110
Buildings and equipment		441				295
Less: Accumulated depreciation		(152	)			(118	)
Patent		30				33
	$	765			$	645
Liabilities
Accounts payable	$	24			$	52
Accrued liabilities		2				25
Notes payable		54				0
Lease liability		137				0
Bonds payable		70				148
Shareholders’ Equity
Common stock		74				50
Paid-in capital—excess of par		271				205
Retained earnings		133				165
	$	765			$	645

Required:
Prepare the statement of cash flows of Surmise Company for the year ended December 31, 2021. Use the indirect method to present cash flows from operating activities because you do not have sufficient information to use the direct method. You will need to make reasonable assumptions concerning the reasons for changes in some account balances. A spreadsheet or T-account analysis will be helpful. (Hint: The right to use a building was acquired with a seven-year lease agreement. Annual lease payments of $9 million are paid at January 1 of each year starting in 2021.) (Enter your answers in millions (i.e., 10,000,000 should be entered as 10). Amounts to be deducted should be indicated with a minus sign.)

Answer 1

Solution:
	Statement of Cash Flows - Indirect Approach
		Amount in $	Amount in $
	Net Cash flows from operating activities
	Net income		$                   90
	Adjustments for reconcile the net income to:
	Depreciation	$                       34
	Amortization of Patent	$                         3
	Decrease in account receivable	$                       47
	Increase in inventories	$                     -18
	Increase in Prepaid Expenses	$                       -3
	Decrease in accounts Payable	$                     -28
	Decrease in Accrued Liabilities	$                     -23
			$                   12
	Net cash from operating activities		$                 102
	Cash flows from investing activities
	Purchase of Investments	$                     -45
	Net cash used in investing activities		$                 -45
	Cash flows from Financing activities
	Issue of Notes Payable	$                       54
	Repayment of Bonds Payable	$                     -78
	Repayment of Lease Liability	$                       -9
	Issue of Common Stock	$                       90
	Cash Dividends Paid	$                   -122
	Net cash used in financing activities		$                 -65
	Net increase in cash and cash equivalents		$                    -8
	Add :Cash and cash equivalents at beginning of period		$             31
	Cash and cash equivalents at end of period		$                   23
	Calculation of Dividend Paid in Cash
	Beginning balance of retaiend Earnings	$                    165
	Add: Net Income of the year	$                       90
	Less: Ending balance of retained earnings	$                    133
	Dividend Paid	$                    122