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 and cash equivalents $ 113,600 $ 136,600

Accounts receivable 89,800 96,800

Inventory 120,600 110,000

Total current assets 324,000 343,400

Property, plant, and equipment 318,000 308,000

Less accumulated depreciation 106,000 77,000

Net property, plant, and equipment 212,000 231,000

Total assets $ 536,000 $ 574,400

Accounts payable $ 70,400 $ 125,000

Income taxes payable 54,600 74,400

Bonds payable 132,000 110,000

Common stock 154,000 132,000

Retained earnings 125,000 133,000

Total liabilities and stockholders’ equity $ 536,000 $ 574,400

During the year, Ravenna paid a $13,200 cash dividend and it sold a piece of equipment for $6,600 that had originally cost $15,600 and had accumulated depreciation of $10,400. The company did not retire any bonds or repurchase any of its own common stock during the year.

1. What is the amount of the net increase or decrease in cash and cash equivalents that would be shown on the company’s statement of cash flows?

2. What net income would the company include on its statement of cash flows?

3.How much depreciation would the company add to net income on its statement of cash flows?

4-a. If the company debited Accounts Receivable and credited Sales for $1,320,000 during the year, what is the total amount of credits recorded in Accounts Receivable during the year?

4-b. What does the amount of these credits represent?

5-a. What is the amount and direction (+ or −) of the accounts receivable adjustment to net income in the operating activities section of the statement of cash flows?

5-b. What does this adjustment represent?

6-a. If the company debited cost of goods sold and credited inventory for $880,000 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?

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

6-c. What does the amount of these debits represent?

7-a. 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?

7-b. What does this amount represent?

8-a. If the company debited income tax expense and credited income taxes payable $1,660 during the year, what is the total amount of the debits recorded in the Income Taxes Payable account?

8-b. What does the amount of these debits represent?

9-a. 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?

9-b. What does this adjustment represent?

10. 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

1)	Ending balance	Beginning Balance	Difference
Cash & Cash Equivalent	$            1,13,600.00	$                     1,36,600.00	$            23,000.00
The net decrease in cash and cash equivalent equal to $23000 decrease in cash balance from 136600 to $113600($23000) shown in the balance sheet.
2) Net Income=Ending Retained Earning-Beginning Retained Earnings+Dividend
Net Income=($125000-$133000+$13200)	$                  5,200.00
3)
2) Depreciation Expense=Ending Accumulated Depreciation -Beginning Accumulated Depreciation+Accumulated Depreciation on assets sold
Depreciation Expense=($106000-$77000+$10400)	$                39,400.00
4a)
	Accounts Receivable
To balance b/d	$                96,800.00	By Cash	$      13,27,000.00
To Sales	$          13,20,000.00	By Balance c/d	$            89,800.00
	$          14,16,800.00		$      14,16,800.00
4b)
$1327000 represents cash received from customers.
5a)
Beginning Accounts Receivable	96800
Ending Accounts Receivable	89800
Difference	7000
Accounts receivable decreased by $7000 added to net income.
5b)It represents that cash collection from customers $1327000,were $7000 higher than the credit sales of $1320000 included in income statement.
6a)
	Inventory Account
To balance b/d	$            1,10,000.00	By Cost of goods sold	$         8,80,000.00
To Accounts Payable	$            8,90,600.00	By Balance c/d	$         1,20,600.00
	$          10,00,600.00		$      10,00,600.00
6b	Accounts Payable
To Cash	$            9,45,200.00	By balance b/d	$         1,25,000.00
To Balance c/d	$                70,400.00	By Inventory	$         8,90,600.00
	$          10,15,600.00		$      10,15,600.00
6c)
Debit balance of Inventory account represents Inventory purchases, and same amount is credited to accounts payable account.
Debit balance of Accounts payable reprents amount paid to Accounts Payable.
7a)
Inventory balance increased by($120600-$110000)=$10600, decreased in net income of operating section of cash flow and Accounts Payable decreased by $54600($125000-$70400)is decreased net income of operating section of cash flow, consolidated effect $65260 decreased in net income.
7b)It represents that cash payment to supplier $945200,were $65200 higher than the cost of goods sold of $880000.
8a)	Income Tax Payable
To Cash	$                21,460.00	By balance b/d	$            74,400.00
To Balance c/d	$                54,600.00	By Income tax expense	$               1,660.00
	$                76,060.00		$            76,060.00
8b)
Debit balance reprents amount paid for Income taxes.
9a)
Income tax payable balance dereased by ($74400-$54600)=$19800,reduced net income under operating section of cash flow.
9b)It represents that cash payment for income taxes 21460,were $19800 higher than the income tax expense of $1660.
10)
Cost of Equipment	$                15,600.00
Accumulated depreciation	$              -10,400.00
Written down value	$                  5,200.00
Less Sale Price	$                  6,600.00
Gain on sale of Equipment($6600-$5200)	$                  1,400.00
Gain on sale of Equipment is reduced net income under operating section of cash flow.