Question

Comparative balance sheets for 2018 and 2017, a statement of income for 2018, and additional information from the accounting records of Red, Inc., are provided below.

RED, INC. Comparative Balance Sheets December 31, 2018 and 2017 ($ in millions)
	2018				2017
Assets
Cash	$	44			$	152
Accounts receivable		198				152
Prepaid insurance		12				5
Inventory		325				195
Buildings and equipment		440				370
Less: Accumulated depreciation		(139	)			(260	)
	$	880			$	614
Liabilities
Accounts payable	$	107			$	140
Accrued expenses payable		11				16
Notes payable		70				0
Bonds payable		181				0
Shareholders’ Equity
Common stock		420				420
Retained earnings		91				38
	$	880			$	614

RED, INC. Statement of Income For Year Ended December 31, 2018
($ in millions)
Revenues
Sales revenue				$	2,200
Expenses
Cost of goods sold	$	1,482
Depreciation expense		50
Operating expenses		545			2,077
Net income				$	123

Additional information from the accounting records:

During 2018, $250 million of equipment was purchased to replace $180 million of equipment (95% depreciated) sold at book value.

In order to maintain the usual policy of paying cash dividends of $70 million, it was necessary for Red to borrow $70 million from its bank.

Required:
Prepare the statement of cash flows of Red, Inc., using the direct method to report operating activities. (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.)

RED, INC.Statement of Cash FlowsFor year ended December 31, 2018

($ in millions)

Cash flows from operating activities:

Cash inflows:

Cash outflows:

Net cash flows from operating activities

Cash flows from investing activities:

Net cash flows from investing activities

Cash flows from financing activities:

Net cash flows from financing activities

Net increase (decrease) in cash

Cash balance, January 1

Cash balance, December 31

Answer 1

RED, INC.
Statement of Cash flows
For the Year Ended December 31, 2018
Amount in million
Cash flows from operating activities
Cash inflows:
Cash received from customers	$   2,154		2200+152-198
Cash outflows:
Cash paid to suppliers	$ (1,645)		1482+140-107+325-195
Cash paid for operating expenses	$     (557)		545+16-11+12-5
Net cash provided by operating activities		$   (48)
Cash flows from investing activities
Cash paid for purchase of equipment	$     (250)
Cash received from sale of equipment	$            9		180*5%
Net cash used by investing activities		$ (241)
Cash flows from financing activities
Payment of cash dividend	$       (70)
Cash received from issuance of note	$         70
Cash received from issuance of bonds	$       181
Net cash provided by financing activities		$   181
Net Decrease in cash and cash equivalents		$ (108)
Cash and cash equivalents at beginning of period		$   152
Cash and cash equivalents at end of period		$      44

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