Question

A comparative balance sheet and an income statement for Burgess Company are given below:

Burgess Company Comparative Balance Sheet (dollars in millions)
	Ending Balance			Beginning Balance
Assets
Current assets:
Cash and cash equivalents	$	69		$	141
Accounts receivable		940			858
Inventory		800			730
Total current assets		1,809			1,729
Property, plant, and equipment		1,805			1,754
Less accumulated depreciation		950			741
Net property,plant, and equipment		855			1,013
Total assets	$	2,664		$	2,742
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	320		$	190
Accrued liabilities		210			140
Income taxes payable		137			102
Total current liabilities		667			432
Bonds payable		565			900
Total liabilities		1,232			1,332
Stockholders' equity:
Common stock		295			295
Retained earnings		1,137			1,115
Total stockholders' equity		1,432			1,410
Total liabilities and stockholders' equity	$	2,664		$	2,742

Burgess Company Income Statement (dollars in millions)
Sales	$	4,600
Cost of goods sold		3,140
Gross margin		1,460
Selling and administrative expenses		940
Net operating income		520
Nonoperating items:
Gain on sale of equipment		2
Income before taxes		522
Income taxes		172
Net income	$	350

Burgess also provided the following information:

The company sold equipment that had an original cost of $72 million and accumulated depreciation of $37 million. The cash proceeds from the sale were $37 million. The gain on the sale was $2 million.

The company did not issue any new bonds during the year.

The company paid a cash dividend during the year.

The company did not complete any common stock transactions during the year.

Required:

Using the indirect method, prepare a statement of cash flows for the year. (Enter your answers in millions not in dollars. List any deduction in cash and cash outflows as negative amounts.)

Answer 1

Burgess Company

Statement of Cash Flows for the year (Amounts in million $)

A) Cash Flows from Operating Activities
Net Income		350
Add: Depreciation expense for the year (see Working note 1)	246
Less: Gain on sale of Equipment	(2)	244
Operating cash flows before working capital adjustments		594
Less: Increase in Accounts receivable (940-858)	(82)
Less: Increase in Inventory (800-730)	(70)
Add: Increase in Accounts Payable (320-190)	130
Add: Increase in Accrued Liabilities (210-140)	70
Add: Increase in Income taxes payable (137-102)	35	83
Net Cash provided by Operating Activities (A)		677
B) Cash Flows from Investing Activities
Sale of Equipment	37
Purchase of Equipment (See WN 2)	(123)
Net Cash used for Investing Activities (B)		(86)
C) Cash Flows from Financing Activities
Dividends paid (See WN 3)	(328)
Redemption of bonds (900-565)	(335)
Net Cash used for Financing Activities (C)		(663)
Net Increase (decrease) in cash and cash equivalents (A+B+C)		(72)
Add: Beginning Cash and cash equivalents		141
Ending cash and cash equivalents		69

Working Notes:-

1) Depreciation Exp = Ending Acc. Dep - (Beg. Acc Dep - Acc. dep. on equipment sold)

= $950 - ($741-$37) = $950 - $704 = $246 millions

2) Equipment Purchased = Ending Balance of PPE - (Beg. Bal of PPE - Cost of equipment sold)

= $1,805 - ($1,754 - $72)

= $1,805 - $1,682 = $123 millions

3) Dividends paid = Beg. bal of retained earnings + Net Income - Ending Retained Earnings

= $1,115+$350-$1,137 = $328 millions