Question

Ravenna Company is a merchandiser that uses the indirect method to prepare the operating activities section of its statement of cash flows. Its balance sheet for this year is as follows:

	Ending Balance			Beginning Balance
Cash	$	121,800		$	146,550
Accounts receivable		95,900			103,400
Inventory		128,800			117,500
Total current assets		346,500			367,450
Property, plant, and equipment		339,000			329,000
Less accumulated depreciation		113,000			82,250
Net property, plant, and equipment		226,000			246,750
Total assets	$	572,500		$	614,200
Accounts payable	$	75,200		$	133,500
Income taxes payable		58,300			80,200
Bonds payable		141,000			117,500
Common stock		164,500			141,000
Retained earnings		133,500			142,000
Total liabilities and stockholders’ equity	$	572,500		$	614,200

During the year, Ravenna paid a $14,100 cash dividend and it sold a piece of equipment for $7,050 that had originally cost $16,800 and had accumulated depreciation of $11,200. The company did not retire any bonds or repurchase any of its own common stock during the year.

f. If the company debited cost of goods sold and credited inventory for $940,000 during the year, what is the total amount of inventory purchases recorded on the debit side of the Inventory T-account and the credit side of the Accounts Payable T-account?

g. What is the total amount of the debits recorded in the Accounts Payable T-account during the year?

h. What is the combined amount and direction (+ or ?) of the inventory and accounts payable adjustments to net income in the operating activities section of the statement of cash flows?

i. If the company debited income tax expense and credited income taxes payable $1,780 during the year, what is the total amount of the debits recorded in the Income Taxes Payable account?

j. What is the amount and direction (+ or ?) of the income taxes payable adjustment to net income in the operating activities section of the statement of cash flows?

k. Would the operating activities section of the company’s statement of cash flows contain an adjustment for a gain or a loss? What would be the amount and direction (+ or ? ) of the adjustment?

Answer 1

f) Calculation of the total amount of inventory purchases

Cost of Goods Sold = Beginning Inventory + Inventory PUrchases - Ending INventory

940,000 = 117,500 + Purchases – 128,800

Purchases = $951,300

The total amount of inventory purchases is $951,300 recorded on the debit side of the Inventory T-account and the credit side of the Accounts Payable T-account.

g) Total amount of Debits recorded in the Accounts Payable T-Account during the year

Total Amount of Debits recorded = Beginning Balance + Purchases - Ending Balance

= 133,500 + 951,300 – 75,200

= $1,009,600

h) the combined amount and direction (+ or ?) of the inventory and accounts payable adjustments to net income in the operating activities section of the statement of cash flows = $1,009,600 (-)

Cash paid to suppliers (Accounts Payable) = $1,009,600 (-)

i) total amount of the debits recorded in the Income Taxes Payable account = Beginning Tax Payable + Income tax recorded during the year - Ending Tax Payable

= 80,200 + 1780 - 58,300

= $23,680

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