Question

the comparative balance sheets for 2018 and 2017 are given below for Surmise Company. Net income for 2018 was $60 million.

SURMISE COMPANY Comparative Balance Sheets December 31, 2018 and 2017 ($ in millions)
	2018				2017
Assets
Cash	$	60			$	69
Accounts receivable		79				86
Less: Allowance for uncollectible accounts		(14	)			(4	)
Prepaid expenses		9				6
Inventory		132				120
Long-term investment		74				45
Land		78				78
Buildings and equipment		320				220
Less: Accumulated depreciation		(106	)			(88	)
Patent		14				17
	$	646			$	549
Liabilities
Accounts payable	$	8			$	21
Accrued liabilities		1				9
Notes payable		28				0
Lease liability		92				0
Bonds payable		54				102
Shareholders’ Equity
Common stock		59				50
Paid-in capital—excess of par		249				205
Retained earnings		155				162
	$	646			$	549

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

Surmise Company

Statement of Cash Flows Cash flows from operating activities: Net income $60 Adjustments for noncash effects: Depreciation expense 18 Bad debt expense 10 Patent amortization expense 3 Decrease in accounts receivable 7 Increase in inventory -12 Decrease in accounts payable -13 Increase in prepaid expenses -3 Decrease in accrued liabilities -8 Net cash flows from operating activities $2 Cash flows from investing activities: Purchase of long-term investment -29 Net cash flows from investing activities -29 Cash flows from financing activities: Issuance of note payable 28 Retirement of bonds payable -48 Sale of common stock 50 Payment of cash dividends -12 Net cash flows from financing activities 18     Net increase in cash $0 ($9) Cash balance, January 1 69 Cash balance, December 31 $60 Noncash investing and financing activities: Acquired buildings by capital lease $100