Question

The comparative balance sheets for 2018 and 2017 and the income statement for 2018 are given below for Arduous Company. Additional information from Arduous’s accounting records is provided also.

ARDUOUS COMPANY Comparative Balance Sheets December 31, 2018 and 2017 ($ in millions)
	2018				2017
Assets
Cash	$	125			$	89
Accounts receivable		198				210
Investment revenue receivable		14				12
Inventory		212				208
Prepaid insurance		12				20
Long-term investment		180				133
Land		212				158
Buildings and equipment		420				416
Less: Accumulated depreciation		(103	)			(136	)
Patent		38				40
	$	1,308			$	1,150
Liabilities
Accounts payable	$	58			$	81
Salaries payable		14				20
Bond interest payable		16				12
Income tax payable		20				26
Deferred income tax liability		27				16
Notes payable		27				0
Lease liability		83				0
Bonds payable		223				291
Less: Discount on bonds		(30	)			(35	)
Shareholders’ Equity
Common stock		454				418
Paid-in capital—excess of par		111				93
Preferred stock		83				0
Retained earnings		239				228
Less: Treasury stock		(17	)			0
	$	1,308			$	1,150

ARDUOUS COMPANY Income Statement For Year Ended December 31, 2018 ($ in millions)
Revenues and gain:
Sales revenue	$	480
Investment revenue		18
Gain on sale of treasury bills		2		$	500
Expenses and loss:
Cost of goods sold		188
Salaries expense		81
Depreciation expense		10
Patent amortization expense		2
Insurance expense		15
Bond interest expense		36
Loss on machine damage		28
Income tax expense		44			404
Net income				$	96

Additional information from the accounting records:

1. Investment revenue includes Arduous Company’s $14 million share of the net income of Demur Company, an equity method investee.
2. Treasury bills were sold during 2018 at a gain of $2 million. Arduous Company classifies its investments in Treasury bills as cash equivalents.
3. A machine originally costing $86 million that was one-half depreciated was rendered unusable by a flood. Most major components of the machine were unharmed and were sold for $15 million.
4. Temporary differences between pretax accounting income and taxable income caused the deferred income tax liability to increase by $11 million.
5. The preferred stock of Tory Corporation was purchased for $33 million as a long-term investment.
6. Land costing $54 million was acquired by issuing $27 million cash and a 15%, four-year, $27 million note payable to the seller.
7. The right to use a building was acquired with a 15-year lease agreement; present value of lease payments, $90 million. Annual lease payments of $7 million are paid at the beginning of each year starting January 1, 2018.
8. $68 million of bonds were retired at maturity.
9. In February, Arduous issued a stock dividend (7.2 million shares). The market price of the $5 par value common stock was $7.50 per share at that time. Also the company paid a cash dividend.
10. In April, 1 million shares of common stock were repurchased as treasury stock at a cost of $17.00 million.

Required:
Prepare the statement of cash flows of Arduous Company for the year ended December 31, 2018. Present cash flows from operating activities by the direct method. (Do not round your intermediate calculations. 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

Arduous company

Statement of cash flows

Using direct method

Particulars	Amount ($)	Amount ($)
Cash flows from operating activities
Cash collection from customers (480+210-198)		492
Investment revenue collection (14-12)		2
Gain on sale of treasury		2
Cash payment to suppliers (188 +81-58 + 212-208)		-215
Cash paid for bond interest (36+12-16+) -(35-30)		-27
cash paid for employees (81+20-14)		-87
Cash paid for income tax (44+26-20+16-27)		-39
Cash paid for insurance		-7
Net cash flows from operating activities		121
Cash flows from investing activities
Proceeds from sale of machine		15
Land purchase		-27
New long term investment as given		-33
Net cash used for investing activities		-45
Cash flows from financing activities
Issuance of preference share		83
Bonds retirement payment		-68
Lease payment		-7
Purchase of treasury stock		-17
Cash dividend paid		-31
Net cash flow provided by financing activities		-40
Increase in cash		36
Cash and cash equivalents at the beginning of the year		89
Cash and cash equivalents at the end of year		125

Working note

Computation of cash dividend

Total dividend = Opening retained earnings + net profit – closing retained earnings = 228+96-239 = 85

Stock dividend = 7.2*7.5 =54

Cash dividend = 85-54 = 31 million