Question

The comparative balance sheets for 2018 and 2017 are given below for Surmise Company. Net income for 2018 was $86 million.

SURMISE COMPANY Comparative Balance Sheets December 31, 2018 and 2017 ($ in millions)
	2018				2017
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, 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 $7 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

Surmise Company
Statement of Cash Flows - Indirect Method as on Dec 31, 2018
	$ in millions	$ in millions
Operating activities:
Net Income	86.00
Adjustments to convert net income to cash basis:
Depreciation (146-114)	32.00
Amortisation of patent (29-28)	1.00
Increase in inventory (141- 125)	-16.00
Decrease in accounts receivable (113 - 93)	20.00
Increase in prepaid expenses (23 -19)	-4.00
Increase in accounts for uncollectible accounts (28-5)	23.00
Decrease in accounts payable (48 - 22)	-26.00
Decrease in accrues liabilities (23 - 3)	-20.00
Net cash provided by operating activities	96.00
Investing activities:
Purchase of long term investment (73-30)	-43.00
Payment of lease liability	-7.00
Net cash used in investing activities	-50.00
Financing activities:
Issue of Notes	50.00
Issue of Bonds (142 -68)	-74.00
Issuance of common stock for cash (72-50)	22.00
Excess of paid -in - capital (267-205)	62.00
Distribution of dividend (169+86-143)	-112.00
Net cash used in financing activities	-52.00
Net increase in cash	-6.00
Beginning cash and cash equivalents	49.00
Ending cash and cash equivalents		43.00