Question

PREPARE necessary disclosures, including disclosures about noncash financing and investing activities for Statement of Cash Flows!​

	Smart Construction Company
	Statement of Cash Flows
	For Year Ended June 30, 2017
	Operating Activities:
	Net Income	$       124,780
	Adjustments for noncash income items:
	Depreciation Expenses	$           3,000
	Loss on Sale of Building	$           1,500
	Amortization Discount on Bond	$                45
	Bad Debt	$           3,500
	Gain on Conversion of Preferred Stock	$         (4,000)
	Gain on Repayment of Note Payable	$         (1,000)
	Shared Income from Subsidiary	$         (6,000)
	Dividend Received from Subsidiary	$           2,000
	Provision for Pension	$       350,000
	Adjustments from cash flow effect from working capital items:
	Increase in Accounts Receivable	$       (30,000)
	Increase of Billings on Construction in Progress	$       (61,250)
	Decrease in Prepaid Expenses	$         35,000
	Increase in Income Tax	$         10,975
	Increase in Accounts Payable	$       122,500
	Increase in Interest Payable	$           3,600
	Decrease in Pension Liability	$     (100,000)
	Net cash provided (used) by operating activities	$       454,650
	Investing activities:
	Marketable Security	$         (1,300)
	Investments (long-term)	$         (9,500)
	Lease Obligation Paid	$         (2,000)
	Sale of Building	$         26,000
	Net cash provided (used) by investing activities	$         13,200
	Financing Activities:
	Common Stock Issued	$           8,000
	Bonds Payable	$         43,650
	Dividend Paid	$            (650)
	Net cash provided (used) by financing activities	$         51,000
	Net Cash Flow	$       518,850
	Cash, June 30, 2016	$       361,700
	Cash, June 30, 2017	$       880,550

SMART CONSTRUCTION COMPANY
Cash Flows Worksheet
For Year Ended June 30, 2017
	Balances		Change		Worksheet Entries
Account Titles	6/30/2016	6/30/2017	Increase (Decrease)		Debit		Credit
Debits
Cash	$      361,700	$       880,550	$                518,850		$    518,850
Noncash Accounts:
Accounts Receivable	$      100,000	$       125,000	$                  25,000		$      30,000		$        5,000
Marketable Securities (at cost)	$        11,700	$         13,000	$                    1,300		$        1,300
Allowance for Change in Value	$          1,500	$           1,800	$                       300		$           300
Construction in Process	$      168,750	$       405,000	$                236,250		$    236,250
Prepaid Expenses	$        45,000	$         10,000	$                 (35,000)				$      35,000
Investments (long-term)	$               -	$         13,500	$                  13,500		$      15,500		$        2,000
Leased Equipment	$               -	$         20,000	$                  20,000		$      20,000
Building	$        30,000	$                -	$                 (30,000)				$      30,000
Deferred Tax Asset	$          5,375	$           2,200	$                   (3,175)				$        3,175
Land	$        10,500	$         10,500	$                          -
Discount on Bonds Payable	$               -	$           1,305	$                    1,305		$        1,350		$             45
Totals	$      734,525	$    1,482,855	$                748,330
Credits
Allowance for Doubtful Accounts	$          6,000	$           4,500	$                   (1,500)		$        1,500
Accounts Payable	$        87,500	$       210,000	$                122,500				$    122,500
Deferred Tax Liability	$          1,000	$           3,300	$                    2,300				$        2,300
Income Tax Payable	$          3,500	$           9,000	$                    5,500				$        5,500
Note Payable (long-term)	$          3,500	$                -	$                   (3,500)		$        3,500
Accumulated Depreciation on Building	$          2,500	$                -	$                   (2,500)		$        2,500
Accumulated Depreciation on Leased Asset	$               -	$           3,000	$                    3,000				$        3,000
Lease Obligation	$               -	$         18,000	$                  18,000				$      18,000
Interest Payable on Lease Obligation	$               -	$           1,800	$                    1,800				$        1,800
Interest Payable (bonds)	$               -	$           1,800	$                    1,800				$        1,800
Bonds Payable	$               -	$         45,000	$                  45,000				$      45,000
Billings on Construction in Process	$      150,000	$       325,000	$                175,000				$    175,000
Pension Liability	$      150,000	$       400,000	$                250,000		$    100,000		$    350,000
Convertible Preferred Stock, $100 par	$          9,000	$                -	$                   (9,000)		$        9,000
Common Stock, $10 par	$        14,000	$         24,500	$                  10,500				$      10,500
Additional Paid-in Capital	$          8,700	$         13,700	$                    5,000				$        5,000
Unrealized Increase in Value of Marketable Securities	$          1,500	$           1,800	$                       300				$           300
Retained Earnings	$      297,325	$       421,455	$                124,130		$           650		$    124,780
Totals	$      734,525	$    1,482,855	$                748,330
Cash Flows from Operating Activities:	Debits	Credits
Net Income	$      124,780
Depreciation Expenses	$          3,000
Loss on Building Destroyed Due to Fire	$          1,500
Amortization Discount on Bond	$               45
Bad Debt	$          3,500
Gain on Conversion of Preferred Stock		$           4,000
Gain on Repayment of Note Payable		$           1,000
Shared Income from Subsidiary		$           6,000
Dividend Received from Subsidiary	$          2,000
Provision for Pension	$      350,000
Increase in Accounts Receivable		$         30,000
Increase in Inventory (billings on construction in process)		$         61,250
Decrease in Prepaid Expenses	$        35,000
Increase in Income Tax Payable	$        10,975
Increase in Accounts Payable	$      122,500
Increase in Interest Payable	$          3,600
Decrease in Pension Liability		$       100,000
Cash Flows from Investing Activities:
Marketable Security		$           1,300
Investments (long-term)		$           9,500
Lease Obligation Paid		$           2,000
Sale of Building	$        26,000
Cash Flows from Financing Activities
Common Stock Issued (including additional capital)	$          8,000
Bonds Payable	$        43,650
Dividends Paid		$              650
Net Increase in Cash		$       518,850
Totals	$      734,550	$       734,550

Additional information:
a. Dividends declared and paid totaled $650.
b. 300 shares of common stock (at par) were issued for cash.
c. On July 1, 2016, convertible preferred stock that had originally been issued at par value were
converted into 500 shares of common stock. The book value method was used to account for the
conversion.
d. The long-term note payable was paid by issuing 250 shares of common stock at the beginning of the
fiscal year.
e. Short-term marketable securities were purchased at a cost of $1,300. The portfolio was increased by
$300 to a $14,800 fair value at year-end by adjusting the related allowance account.
f. During the year, a 30% interest in Ricochet Co. was purchased as an investment for $9,500. Ricochet
reported $20,000 in net income for the year and paid dividends of $2,000 to Smart.
g. $5,000 of accounts receivable were written off as uncollectible during the year.
h. Smart’s inventory consists of Construction-in-Process in excess of the Billings on
Construction-in-Process account balance.
i. A building was destroyed by fire during the year and insurance proceeds of $26,000 were collected.
j. The 12% bonds payable were issued on February 28, 2017, at 97. They mature on February 28, 2027.
The company uses the straight-line method to amortize bond premiums and discounts.
k. Smart recorded pension expense of $350,000 for the year.
l. A lease agreement was signed on July 1st, 2016 for the use of equipment worth $20,000. The
company determined that the transaction should be recorded as a capital lease.

Answer 1

1. Disclosures about noncash item :

a.)Depreciation Expenses : Depreciation Expenses is a non cash item and this is debit to profit and loss accoount because on account of Depreciation debiting to P/L,there is no inflow and outflow of cash. hence depreciation is add back too net income to calculate net cash used/flow from operating activities. Journal entrires for Depreciation is : Depreciation account Debit

To Fixed Assest Credit

b.)Loss on Sale of Building: Loss on sale of building is debit to P/L account but by debiting loss to profit and loss account we have not reecived or we have not given cash to anyone i.e : there is no inflow and outfow of actual cash. hence loss on sale of building is add back too net income to calculate net cash used/flow from operating activities. through below journal entries we can understabd this in better way. Journal entrires for Loss on Sale of Building is : Profit and loss account(Debit)

To Loss on sale of assets(Credit)

Journal entrires for Sale of Building is : Cash/Bank account (Debit)

Loss on sale of assets(debit)

To Building account(Credit)

This is very clear that on loss of sale of building no cash is in or no cash is out and cash received from sale of building is investing activity and Loss on Sale of Building is non cash item.

c.)Amortization Discount on Bond: Amortization for Discount is just amortizartion of miscellaneous expenditure into profit or loss. from amortization Smart Construction Company has not received any cash nor it has given cash. hence Amortization of Discount on Bond is non cash item and this is add back too net income to calculate net cash used/flow from operating activities.  Journal entrires for Amortization of discount is : Profit and loss account (Debit)

To Amortization of discount (Credit)

d.)Bad Debt : Bad Debt is debit to profit and loss account as an expense but on account of occuring bad dabts orgnasaition has not spend any cash on the same. Bad Debt is just like a loss on account of not collecting our account receivable. Journal entry for Bad Debt is : Bad debts account (Debit)

To Debtors account (Credit)

Transfer of bad debts to Profit and loss account : Profit and loss account (Debit)

To Bad debts (Credit)

hence Bad Debts is non cash item and this is add back too net income to calculate net cash used/ flow from operating activities

e.)Gain on Conversion of Preferred Stock/Gain on Repayment of Note Payable : Gain on Conversion of Preferred Stock is non cash item bacause on account of conversion there is no inflow or outflow of cash. Gain on Repayment of Note Payable is non cash item because cash paid for Repayment of Notes payable has already been included as financing activity while preparing cash flow statement.

f.)Shared Income from Subsidiary : Shared Income from Subsidiary is disallowed item in calcluating net cash used/flow from operating activities becasue shared income from subsidiary is included as investing activity while preparing cash flow statement as this is income of Smart Construction Company that has earned on account of investment made in subsidiaries.

g.)Dividend Received from Subsidiary : Dividend Received from Subsidiary is disallowed item in calcluating net cash used/flow from operating activities becasue Dividend Received from subsidiary is included as investing activity while preparing cash flow statement as this is income of Smart Construction Company that has earned on account of purchasing shares of subsidiary company.

h.) Provision for Pension : Provisions are less certain, but they are not completely uncertain. Companies elect to make provisions for future obligations where the specific amount or timing is unknown and provision for pension is non cash item because because on account of making a provsion there is no inflow and outflow of cash. hence Provision for pension is add back to net income to calculate net cash used/flow from operating activities. Journal entrires for provison is :

Profit and loss account (Debit)

To Provision for Pension account(Credit)

hence Provision for Pension is non cash item and this is add back too net income to calculate net cash used/ flow from operating activities.

2. Disclosures about Investing activities:

a.)Marketable Security : Company made investment to earn income from ideal cash which is lying in company account. cash used in purchasing Securiites from market is short term investmen. hence Marketable Security is investing activity.

b.) Investments (long-term) : To gain benrfit in long term Company made long term investment to earn income from ideal cash which is lying in company account. cash used in making long term investment is called long term investment. hence Investments (long-term) is investing activity.

c.)Lease Obligation Paid : Assets taken on Lease is always treated as investments. hence Lease Obligation Paid is investing activity.

d.) Sale of Building : Building is purchased to run a business and to derive economic benefit in future by suing the same. every organiastion invest in building to smooth runnning of business hence Sale of Building is investing actvity.

3.Disclosures about Financing activities:

a.)Common Stock Issued : Finance is like blood in human being. every company get cash from ublic on account of issuing our shares in market hence Common Stock Issued i.e: equiry shares issued to get money from genral public is part of financing activity.

b.) Bonds Payable: Bonds is like a debenture. company issued debentures or bond to public get finance and fixed interest is paid by the company on bonds or debentures. Payment of Bonds payable is part of financing activity.

C).Dividend Paid : Dividend is Paid on Common Stock/Equity shares Issued by the organisation. above mentioned Common Stock Issued is part of financing activity. hence dividend paid on the same is also a part of financing activity.