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.the whole cash flow statement needs to be done

Explanation / Answer

The balance sheet and the income statement for the year 2015 and 2016 is given below

During the year $180 million of equipment (historical cost) was sold at book value. The book value at the 80% depreciated level would be $36 million.

Borrowings of $32 million to pay out $32 million dividend

Cash flow indirect method

Cash flow from Operations

Following calculations will be helpful in understanding the methodology related to the above result:

In Cash flow from Operations all the activities related to operations are considered. Start with Net Income and add the depreciation to it as depreciation is a non-cash expense. All the current assets, apart from cash, which increase leading to cash outflow while current liabilities when increase lead to an equivalent cash inflow as increase in liabilities lead to reduced cash outflow.

To calculate the investing cash flow, the property plant equipment sales lead to cash inflow. Purchase of property plant equipment is calculated as (Ending Gross PPE($492)+Gross PPE SOld ($180)- Begining Gross PPE ($357)).

To calculate the financing cash flow, the increase in borrowings are added. Increase in note payable, and loan taken for bank add to cash inflow. However the dividend payout leads to cash outflow.

The cash flow from operation+ investing+ financing will give the total change in cash during the year. (12-279+148= -119) which is equal to the difference in cash on balance sheet in 2016 and 2015. (31-150 = -119).

Balance Sheet 2016 2015 Assets Cash 31 150 Account Receivable 255 239 Prepaid Insurance 6 2 Inventory 215 100 Buildings & Equipment 492 357 less Acc Depreciation -126 -247 Total Asset 873 601 Liabilities Account Payables 85 114 Accrued expense payable 5 9 Notes Payable 32 0 Bonds Payable 148 0 Shareholder's Equity 407 407 Retained Earnings 196 71 Total Laibilities and SE 873 601

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