Question

The comparative balance sheets for 2021 and 2020 are given below for Surmise Company. Net income for 2021 was $78 million.

SURMISE COMPANY Comparative Balance Sheets December 31, 2021 and 2020 ($ in millions)
	2021				2020
Assets
Cash	$	45			$	55
Accounts receivable		88				104
Less: Allowance for uncollectible accounts		(25	)			(6	)
Prepaid expenses		20				15
Inventory		121				100
Long-term investment		98				60
Land		96				96
Buildings and equipment		391				265
Less: Accumulated depreciation		(134	)			(106	)
Patent		24				27
	$	724			$	610
Liabilities
Accounts payable	$	18			$	40
Accrued liabilities		3				19
Notes payable		46				0
Lease liability		119				0
Bonds payable		63				129
Shareholders’ Equity
Common stock		68				50
Paid-in capital—excess of par		259				205
Retained earnings		148				167
	$	724			$	610

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 $7 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 Adjustments for noncash effects: Changes in operating assets and liabilities: Net cash flows from operating activities Cash flows from investing activities: Net cash flows from investing activities Cash flows from financing activities: Net cash flows from financing activities Net increase (decrease) in cash Cash balance, January 1 Cash balance, December 31 Noncash investing and financing activities:

Answer 1

Cash flow statement
Indirect method
Net income/Loss		0
annual depreciation	134-106	28
changes in working capital
decrease in A/R	(104-6)-(88-25)	35
Increase in Prepaid expenses	15-20	-5
Increase in Inventory	100-121	-21
Decrease in A/P	18-40	-22
Decrease in Accrued liabilities	3-19	-16
Increase in notes payable	46-0	46
net cash flow from operating activities			45
cash flow from investing activities
purchase of building and equipment		-26
purchase of long term investment		-38
sale of patent		3
net cash flow from investing activities			-61
cash flow from financing activities
payment to debentureholders		-66
Issuance of common stock	(68+259)-(50+205)	72
net cash flow from financing activities			6
net cash flow during the year			-10
beginning cash balance			55
Year end cash balance			45