Question

The comparative balance sheets for 2018 and 2017 are given below for Surmise Company. Net income for 2018 was $88 million.

SURMISE COMPANY Comparative Balance Sheets December 31, 2018 and 2017 ($ in millions)
	2018				2017
Assets
Cash	$	32			$	39
Accounts receivable		94				115
Less: Allowance for uncollectible accounts		(30	)			(6	)
Prepaid expenses		25				20
Inventory		147				130
Long-term investment		74				30
Land		108				108
Buildings and equipment		432				290
Less: Accumulated depreciation		(149	)			(116	)
Patent		29				31
	$	762			$	641
Liabilities
Accounts payable	$	23			$	50
Accrued liabilities		4				24
Notes payable		52				0
Lease liability		134				0
Bonds payable		69				145
Shareholders’ Equity
Common stock		73				50
Paid-in capital—excess of par		269				205
Retained earnings		138				167
	$	762			$	641

Required:
Prepare the statement of cash flows of Surmise Company for the year ended December 31, 2018. 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 $8 million are paid at January 1 of each year starting in 2018.) (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

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Surmise			Workings	$ Millions
Cashflow statement as on 31.12.2018			Net Income for the year
Indirect Method	$ Millions	$ Millions	Closing Balance of Retained earnings	138.00
Particulars			Less: Opening Balance	167.00
Net Income	(29.00)		Net Income for the year	(29.00)
Adjustment to reconcile Net Income to Net Cash
Add:			Depreciation Expense
Depreciation Expense	33.00		Accumulated depreciation- Closing Balance	149.00
Amortization Expense- Patents	2.00		Less: Opening Balance	116.00
Cash flow from Operations		6.00	Depreciation Expense	33.00
Changes in Current Assets/Current Liabilities
Decrease in Accounts Receivable	45.00		Amortization Expense- Patents
Increase in Prepaid Expenses	(5.00)		Opening Balance	31.00
Increase in Inventory	(17.00)		Less: Closing Balance	29.00
Decrease in Accounts Payable	(27.00)		Amortization Expense- Patents	2.00
Decrease in Accrued liabilities	(20.00)	(24.00)
Net cash provided by (Used for) operating activities		(18.00)	Decrease in Accounts Receivable
			Closing Balance (net)	64.00
Cash flow from investing activities			Less: Opening Balance (net)	109.00
Long-term investment Purchased	(44.00)		Decrease in Accounts Receivable	(45.00)
Buildings and equipment Purchased	(142.00)
Net cash provided by (Used for) investing activities		(186.00)	Increase in Prepaid Expenses
			Closing Balance	25.00
Cash flow from financing activities			Less: Opening Balance	20.00
Notes payable issued	52.00		Increase in Prepaid Expenses	5.00
Bonds payable paid	(76.00)
Lease Liability	134.00		Increase in Inventory
Equity issued	87.00		Closing Balance	147.00
Net cash provided by (Used for) financing activities		197.00	Less: Opening Balance	130.00
			Increase in Inventory	17.00
Net Increase/(Decrease) in cash		(7.00)
Cash Balance, December 31, 2017		39.00	Long-term investment Purchased
Cash Balance, December 31, 2018		32.00	Closing Balance	74.00
			Less: Opening Balance	30.00
			Long-term investment Purchased	44.00
			Buildings and equipment Purchased
			Closing Balance	432.00
			Less: Opening Balance	290.00
			Buildings and equipment Purchased	142.00
			Decrease in Accounts Payable
			Closing Balance	23.00
			Less: Opening Balance	50.00
			Decrease in Accounts Payable	(27.00)
			Decrease in Accrued liabilities
			Closing Balance	4.00
			Less: Opening Balance	24.00
			Decrease in Accrued liabilities	(20.00)
			Notes payable issued
			Closing Balance	52.00
			Less: Opening Balance	-
			Notes payable issued	52.00
			Bonds payable paid
			Closing Balance	69.00
			Less: Opening Balance	145.00
			Bonds payable paid	(76.00)
			Lease Liability
			Closing Balance	134.00
			Less: Opening Balance	-
			Lease Liability	134.00
			Equity issued
			Closing balances of
			Common stock	73.00
			Paid-in capital—excess of par	269.00
			Less: Opening balances of
			Common stock	50.00
			Paid-in capital—excess of par	205.00
			Equity issued	87.00