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.)

SURMISE COMPANY Statement of Cash Flows For year ended December 31, 2021 ($ in millions) Cash flows from operating activities: Net income $58 Adjustments for noncash effects: Depreciation expense Bad debt expense Amortization expense Changes in operating assets and liabilities: Decrease in accounts receivable Increase in inventory Decrease in accounts payable Increase in prepaid expenses Decrease in accrued liabilities Net cash flows from operating activities $58 Cash flows from investing activities: Purchase of long-term investment Net cash flows from investing activities 0 Cash flows from financing activities: Payment of lease liability Issuance of notes payable Retirement of bonds payable Sale of common stock Payment of dividends Net cash flows from financing activities 0 Net increase (decrease) in cash Cash balance, January 1 Cash balance, December 31 $0 Noncash investing and financing activities: Acquired use of buildings by lease

Answer 1

Answer

Cash Flow Statement
	Detail	Net
Cash Flow from Operating Activities
Net Income before taxes		80
Add: Non cash and Non operating Expenses
Depreciation	29
Creation of Bad Debt Allowance	20
Amortization of Patent	1
Working Capital Changes
Decrease in Accounts Receivable	17
Increase in Inventory	(22)
Increase in Prepaid expenses	(3)
Decrease in Accounts Payable	(23)
Decrease in accrued liabilities	(16)
Cash Flow from Operating Activities (A)		83
Cash Flow from Investing Activities
Increase in Long term investment	(39)
Cash Used in Investing Activities (B)		(39)
Cash Flow from Financing Activities
Payment of Lease Liability	(8)
Dividend Paid [80 + 14 (Decrease in Retained Earnings]	(94)
Increase in Notes Payable	48
Payment of Bonds	(68)
Issue of Common Shares at premium ($19 Increase in Common Shares + 56 Increase in Paid in capital)	75
Cash used in Financing Activities ( C)		(47)
Decrease in Cash (A+B+C)		(3)
Opening Cash		58
Closing Cash		55

Euipment
Beg. Bal	270
Lease Liability	130
		Closing Bal.	400
Total	400	Total	400
Acc. Depreciation - Equipment
		Beg. Bal	108
		P&L (Bal.)	29
Closing Bal.	137
Total	137	Total	137

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