Question

The comparative balance sheets for 2018 and 2017 are given below for Surmise Company. Net income for 2018 was $58 million.

SURMISE COMPANY

Comparative Balance Sheets

December 31, 2018 and 2017

($ in millions)

2018 2017

Assets

Cash $ 90 $ 98

Accounts receivable 78 84

Less: Allowance for uncollectible accounts (15 ) (6 )

Prepaid expenses 10 5

Inventory 121 110

Long-term investment 63 35

Land 76 76

Buildings and equipment 311 215

Less: Accumulated depreciation (103 ) (86 )

Patent 13 15

$ 644 $ 546

Liabilities

Accounts payable $ 7 $ 19

Accrued liabilities 2 8

Notes payable 26 0

Lease liability 89 0

Bonds payable 53 99

Shareholders’ Equity

Common stock 58 50

Paid-in capital—excess of par 247 205

Retained earnings 162 165

$ 644 $ 546

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		$58
Adjustments for noncash effects:
Depreciation expense	17
Bad debt expense	9
Patent amortization expense	2
Changes in operating assets and liabilities:
Decrease in accounts receivable	6
Increase in inventory	-11
Decrease in accounts payable	-12
Increase in prepaid expenses	-5
Decrease in accrued liabilities	-6	0
Net cash flows from operating activities		$58
Cash flows from investing activities:
Purchase of long-term investment	-28
Net cash flows from investing activities		-28
Cash flows from financing activities:
Issuance of note payable	26
Retirement of bonds payable	-46
Sale of common stock	50
Annual Leae payment	-7
Payment of cash dividends	-61
Net cash flows from financing activities		-38
Net increase in cash		($8)
Cash balance, January 1		98
Cash balance, December 31		$90
Noncash investing and financing activities:
Acquired buildings by capital lease		$89

Working notes for the above answer is as under

Spreadsheet for the Statement of Cash Flows
	Dec.31		Changes			Changes	Dec. 31
	2018		Debits			Credits	2017
Balance Sheet
Assets:
Cash	90	16	8				98
Accounts receivable	78				5	6	84
Less: Allowance	-15				3	9	-6
Prepaid expenses	10	8	5				5
Inventory	121	6	11				110
Long-term investment	63	10	28				35
Land	76						76
Buildings and equip.	311	11	96				215
Less: Acc. depreciation	-103				2	17	-86
Patent	13				4	2	15
	644						546
Liabilities:
Accounts payable	7	7	12				19
Accrued liabilities	2	9	6				8
Notes payable	26				12	26	0
Lease liability	89			X	11	89	0
Bonds payable	53	13	46				99
Shareholders' Equity:
Common stock	58				14	8	50
Paid-in capital-ex. of par	247				14	42	205
Retained earnings	162	15	61		1	58	165
	644						546