Question

The comparative balance sheets for 2021 and 2020 are given below for Surmise Company. Net income for 2021 was $80 million.

SURMISE COMPANY Comparative Balance Sheets December 31, 2021 and 2020 ($ in millions)
	2021				2020
Assets
Cash	$	55			$	58
Accounts receivable		89				106
Less: Allowance for uncollectible accounts		(24	)			(4	)
Prepaid expenses		19				16
Inventory		132				110
Long-term investment		89				50
Land		98				98
Buildings and equipment		400				270
Less: Accumulated depreciation		(137	)			(108	)
Patent		25				26
	$	746			$	622
Liabilities
Accounts payable	$	19			$	42
Accrued liabilities		4				20
Notes payable		48				0
Lease liability		122				0
Bonds payable		64				132
Shareholders’ Equity
Common stock		69				50
Paid-in capital—excess of par		261				205
Retained earnings		159				173
	$	746			$	622

Required:
Prepare the statement of cash flows of Surmise Company for the year ended December 31, 2021. 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 2021.) (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

	Cash Flow Statement (Indirect Method)
	Particulars	Amount	Amount
	Net Income		$              80.00
	Adjustments to reconcile net income to:
	Net cash provided by operating activities
	Depreciation	$              29.00
	Decrease in Accounts Receivable	$              17.00
	Increase in Inventory	$            (22.00)
	Increase in Prepayments	$              (3.00)
	Increase in Allowance for doubtful debts	$              20.00
	Increase in Notes Payable	$              48.00
	Decrease in Accounts Payable	$            (23.00)
	Decrease in Accrued Liabilities	$            (16.00)
	Net Cash Generated		$              50.00
	Net cash provided by operating activities	(A)	$           130.00
	Cash Flows from Investing Activities
	Purchase of Building and Equipment	$              (8.00)
	Sale of Patent	$                1.00
	Purchase of investment	$            (39.00)
	Net cash provided by investing activities	(B)	$            (46.00)
	Cash Flows from Financing Activities
	Dividend Paid (W.N.1)	$            (94.00)
	Issue of common stock	$              75.00
	Repayment of Bonds Payable	$            (68.00)
	Net cash provided by Financing activities	(C')	$            (87.00)
	Net increase/decrease in cash	(A+B+C')	$              (3.00)
	Add:Opening cash balance		$              58.00
	Closing cash balance		$              55.00

Workings:

	Dividend (Note 1)
	Beginning balance of Retained Earnings					$           173.00
Add:	Income for the period					$              80.00
Less:	Closing balance of Retained Earnings					$          (159.00)
		Dividend Paid				$              94.00