Question

The accounts balances of ZZ Corp. at December 31 appear below:

Debits			2020			2019
Cash	$		40,000	$		30,000
Accounts receivable			40,000			30,000
Merchandise inventory			122,000			126,000
Prepaid expenses			4,000			6,000
Land			10,000			30,000
Buildings			220,000			160,000
Equipment			123,000			80,000
		$	559,000		$	462,000
Credits
Accounts payable	$		48,000	$		50,000
Accumulated depr			86,000			72,000
Note payable, due 2023			70,000			55,000
Common shares			300,000			250,000
Retained earnings			55,000			35,000
		$	559,000		$	462,000

The following Additional Information is available:

1. Net income for the year was $40,000; income taxes expense was $4,000 and depreciation recorded on building and equipment was $27,000.

2. Equipment costing $30,000 was purchased; one-half was paid in cash and a 4-year promissory note signed for the balance.

3. Equipment costing $50,000 was purchased in exchange for 6,000 common shares.

4. At year-end, Equipment that had originally cost $37,000 were sold for $15,000. At the date of sale, the accumulated depreciation for the asset was $11,000. The gain/loss was reported in net income.

5. An addition to the building was built during the year.

6. Land costing $22,000 was sold for $26,000 cash during the year. The related gain was reported in the income statement.

7. Cash dividends were paid.

Prepare a statement of cash flows for the year ended December 31 , 2020

Answer 1

Statement of cash flows for the year ended December 31 , 2020
Particulars	Amount	Amount
A. Cash flow from operating activities:
Net income for the year before taxation (40,000+4,000)		44,000
Non-cash adjustment to reconcile loss before tax to net cash flows
Depreciation	27,000
Adjustment of Acc Depreciation	-2,000
Gain on sale of land (26,000-22,000)	-4,000
Loss on sale of equipment (15,000-(37,000-11,000))	11,000
		32,000
Operating profit before working capital changes		76,000
Movement in working capital:
Increase in trade receviables (30,000-40,000)	-10000
Decrease in inventory (126,000-122,000)	4000
Decrease in prepaid Expenses (6,000-4,000)	2000
Decrease in trade payables (50,000-48,000)	-2000
		-6000
Cash generated from operations		70,000
Direct taxes paid		-4000
Net cash generated from operating activities (A)		66,000
B. Cash Flow from investing activities:
Purchase Of Equipment (30,000*50%)	-15,000
Sale of Equipment	15,000
Purchase Of Buildings (220000-160000)	-60,000
Sale of Land	26,000
Purchase of Land (Note -2)	-2,000
Cash Flow from investing activities (b)		-36,000
C. Cash Flow from financing activities:
Cash Dividends Paid (Note -1)	-20000
Cash Flow from financing activities (c )		-20000
D. Net Increase/(Decrease) cash and cash equivalents (A+B+C)		10,000
Cash and cash equivalents at the beginning of the year		30,000
Cash and cash equivalents at the end of the year		40,000

Notes :
(1) Cash Dividends Paid
Opening Bal of Retained Earnings	35,000
Net Income for the year	40,000
Closing Bal of Retained Earnings	-55,000
Cash Dividends Paid	20,000
(2) Purchase of Land
Opening Bal of Land (a)	30,000
Cost of Land Sold (b)	22,000
Closing Bal of Land (c )	10,000
Cost of Land Purchased (b+c-a)	2,000
(3) Adjustment of Acc Depreciation
Opening Bal of Acc Depreciation (a)	72,000
Depreciation during the period (b)	27,000
Acc Depreciation towards sale of equipment (c )	11,000
Closing Bal of Acc Depreciation (a+b-c)	88,000
Closing Bal of Acc Depreciation in Balance Sheet	86,000
Adjustment of Acc Depreciation	2,000

Adjustment of Acc Depreciation - The theortical derived closing balance as per the given information in the question should be 88,000, however in the balance sheet the Closing Bal of Acc Depreciation is 86,000. In the absence of any information , in no circumstances the Closing Bal of Acc Depreciation can be 86,000 therfore difference of 2,000 is taken as adjustment to Accumulated Depreciation