Question

The comparative balance sheets for 2018 and 2017 are given below for Surmise Company. Net income for 2018 was $74 million.

SURMISE COMPANY
Comparative Balance Sheets
December 31, 2018 and 2017
($ in millions)
2018 2017
Assets
Cash $ 27 $ 35
Accounts receivable 86 100
Less: Allowance for uncollectible accounts (19 ) (2 )
Prepaid expenses 15 13
Inventory 129 110
Long-term investment 116 80
Land 92 92
Buildings and equipment 377 255
Less: Accumulated depreciation (128 ) (102 )
Patent 22 23
$ 717 $ 604
Liabilities
Accounts payable $ 16 $ 36
Accrued liabilities 2 17
Notes payable 42 0
Lease liability 113 0
Bonds payable 61 123
Shareholders’ Equity
Common stock 66 50
Paid-in capital—excess of par 255 205
Retained earnings 162 173
$ 717 $ 604

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 $9 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

Statement of cash flows

I. Cash flows from operating activities
Net income	74
Adjustments to reconcile net income to cash flows from operating activities
Depreciation expense	26
Allowance for uncollectible accounts	17
Patents amortized	1
Add: Decrease in current assets
Accounts receivable	14
Less: Increase in current assets
Prepaid expenses	-2
Inventory	-19
Less: Decrease in current liabilities
Accounts payable	-20
Accrued liabilities	-15
Increase in current liabilities
Notes payable	42
Net cash flows from operating activities		118
II. Cash flows from investing activities
Purchase of long term investment	-36
Net cash used in investing activities		-36
III. Cash flows from financing activities
Lease payments	-9
Repayment of bonds payable	-62
Issue of common stock	66
Cash dividend paid	-85
Net cash used in financing activities		-90
Net increase in cash (I + II + III)		-8
Beginning cash balance		35
Ending cash balance		27

Cash dividend paid = Retained earnings, beginning + Net income - Retained earnings, ending

= 173 + 74 - 162

= $85 million

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