Question

The comparative balance sheets for 2018 and 2017 are given below for Surmise Company. Net income for 2018 was $78 million.

SURMISE COMPANY Comparative Balance Sheets December 31, 2018 and 2017 ($ in millions)
	2018				2017
Assets
Cash	$	45			$	55
Accounts receivable		88				104
Less: Allowance for uncollectible accounts		(25	)			(6	)
Prepaid expenses		20				15
Inventory		121				100
Long-term investment		98				60
Land		96				96
Buildings and equipment		391				265
Less: Accumulated depreciation		(134	)			(106	)
Patent		24				27
	$	724			$	610
Liabilities
Accounts payable	$	18			$	40
Accrued liabilities		3				19
Notes payable		46				0
Lease liability		119				0
Bonds payable		63				129
Shareholders’ Equity
Common stock		68				50
Paid-in capital—excess of par		259				205
Retained earnings		148				167
	$	724			$	610

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
For year ended December 31, 2018 ($ in millions)
Cash flows from operating activities:
Net income		$78
Adjustments for noncash effects:
Depreciation expense	28
Bad debt expense	19
Patent amortization expense	3
Decrease in accounts receivable	16
Increase in inventory	-21
Decrease in accounts payable	-22
Increase in prepaid expenses	-5
Decrease in accrued liabilities	-16
Net cash flows from operating activities		$2
		$80
Cash flows from investing activities:
Purchase of long-term investment	-38
Net cash flows from investing activities		-38
Cash flows from financing activities:
Issuance of note payable	46
Retirement of bonds payable	-66
Payment of lease	-7
Sale of common stock	72
Payment of cash dividends	-97
Net cash flows from financing activities		-52
Net increase in cash		($10)
Cash balance, January 1		55
Cash balance, December 31		$45
Noncash investing and financing activities:
Acquired buildings by capital lease		$119

Working notes for the above answer is as under