Comparative balance sheets for 2016 and 2015, a statement of income for 2016, an

Question

Comparative balance sheets for 2016 and 2015, a statement of income for 2016, and additional information from the accounting records of Red, Inc., are provided below. RED, INC. Comparative Balance Sheets December 31, 2016 and 2015 ($ in millions) 2016 2015 Assets Cash $ 31 $ 150 Accounts receivable 255 239 Prepaid insurance 6 2 Inventory 215 100 Buildings and equipment 492 357 Less: Accumulated depreciation (126 ) (247 ) $ 873 $ 601 Liabilities Accounts payable $ 85 $ 114 Accrued expenses payable 5 9 Notes payable 32 0 Bonds payable 148 0 Shareholders’ Equity Common stock 407 407 Retained earnings 196 71 $ 873 $ 601 RED, INC. Statement of Income For Year Ended December 31, 2016 ($ in millions) Revenues Sales revenue $ 2,200 Expenses Cost of goods sold $ 1,500 Depreciation expense 23 Operating expenses 520 2,043 Net income $ 157 Additional information from the accounting records: a. During 2016, $315 million of equipment was purchased to replace $180 million of equipment (80% depreciated) sold at book value. b. In order to maintain the usual policy of paying cash dividends of $32 million, it was necessary for Red to borrow $32 million from its bank. Required: Prepare the statement of cash flows of Red, Inc. using the indirect method to report operating activities.

Explanation / Answer

Cash flows from operating activities Net income $157 Adjustments for: Depreciation and amortization $23 23 Increase in accounts receivables -16 Increase in prepaid insurance -4 Increase in inventories -115 Decrease in accounts payables -29 Decrease in accrued exp payables -4 Increase in notes payable 32 -136 -113 Cash generated from operations 44

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