Question

The comparative balance sheets for 2021 and 2020 are given below for Surmise Company. Net income for 2021 was $86 million.

SURMISE COMPANY Comparative Balance Sheets December 31, 2021 and 2020 ($ in millions)
	2021				2020
Assets
Cash	$	43			$	49
Accounts receivable		93				113
Less: Allowance for uncollectible accounts		(28	)			(5	)
Prepaid expenses		23				19
Inventory		141				125
Long-term investment		73				30
Land		106				106
Buildings and equipment		423				285
Less: Accumulated depreciation		(146	)			(114	)
Patent		28				29
	$	756			$	637
Liabilities
Accounts payable	$	22			$	48
Accrued liabilities		3				23
Notes payable		50				0
Lease liability		131				0
Bonds payable		68				142
Shareholders’ Equity
Common stock		72				50
Paid-in capital—excess of par		267				205
Retained earnings		143				169
	$	756			$	637

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 $7 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

Sunrise Company		2021
Cash Flow Statement
Particulars		Amount in $ millions
Cash flows from operating activities
Net Income before tax		$           86.00
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation expense (146 - 114)		$           32.00
Cash flow generated from operating activities		$         118.00
Changes in Operating working capital
Decrease in Accounts payable		$          -26.00
Decrease in Accounts receivable		$           43.00
Increase in Prepaid expenses		$            -4.00
Increase in Inventory		$          -16.00
Decrease in accrued liability		$          -20.00
Cash generated from operating activities		$           95.00
Income taxes paid (refer note 2)		$        -112.00
Net cash generated from operating activities	A	$          -17.00
Cash flows from investing activities
Purchase of Property, Plant and Equipment (-106-31+131) - $31 for depreciation on PPE and balance $1 on patent		$            -6.00
Purchase of Long term investment		$          -43.00
Net cash used in investing activities	B	$          -49.00
Cash flows from financing activities
Payments of bonds		$          -74.00
Issue of Common Stock		$           84.00
Issue of notes		$           50.00
Net cash used in financing activities	C	$           60.00
Net decrease in cash and cash equivalents	(A+B+C)	$            -6.00
Cash and cash equivalents as at the beginning of the year		$           49.00
		$           43.00
Cash and bank balances		$           43.00
		$           43.00

Notes
1. Assuming increase in accumulated depreciation is due to current year depreciation. (146 - 114) = $32. $31 for depreciation on PPE and $1 for amotization of patent
2. Statement of retained earnings
Opening retained earnings	169
Less-: Closing retained earnings	143
Change in retained earnings	-26
Net Income for the period given	86
Income tax paid for the year	112
3. Lease liability for $131 is a/c IFRS 16