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

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.)

Solutions

Expert Solution

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

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