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:

1. During 2018, $250 million of equipment was purchased to replace $180 million of equipment (95% depreciated) sold at book value.
2. 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 indirect method to report operating activities. (Amounts to be deducted should be indicated with a minus sign. Enter your answers in millions (i.e., 10,000,000 should be entered as 10).)

Answer 1

Soltion

RED, INC.
Cash Flow Statement
For the ended December 31, 2018 ($ in Million)
Cash Flow from Operating Activities:
Net Income		$   123.00
Adjustments for non cash effects
Depreciation expense	$      50.00
Changes in Operating assets and liabilities
Increase in Accounts receivables	$   (46.00)
Increase in prepaid insurance	$      (7.00)
Increase in Inventory	$ (130.00)
Decrease in accrued expenses payable	$      (5.00)
Decrease in accounts payable	$   (33.00)
		$ (171.00)
A. Cash Flow from Operating Activities		$   (48.00)
Cash Flow from Investing Activities:
Sale of Equipment	$        9.00
Purchase of Equipment	$ (250.00)
B. Cash flow from Investing Activities		$ (241.00)
Cash Flow from Financing Activities:
Issue of Common Stock
Dividend paid	$   (70.00)
Proceeds from notes payable	$      70.00
Issue of bonds	$   181.00
C. Cash Flow from Financing Activities		$   181.00
Increase (Decrease) in cash [A+B+C]		$ (108.00)
Add: cash at the beginning of the year		$   152.00
Cash at the end of the year		$     44.00