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. Balance Sheets for 2016 and 2015 ($ in millions)

                                  Red Inc. Income Statement

                      for the year ended december 31, 2016 ($ in millions)

Additional information from the accounting records:

a) During 2016, $233 million of equipment was purchased to replace $200 million of equipment (95% depreciated) sold at book value.

b) In order to maintain the usual policy of paying cash dividends of $73 million, it was necessary for Red to borrow $73 million from its bank.

Required: Prepare the statement of cash flows of Red, Inc. using the indirect method to report operating activities. (Amounts to be deducted should be indicated with a minus sign. Enter your answers in millions (i.e., 10,000,000 should be entered as 10).)

2016 2015 Assets Cash 37 136 Accounts Recievable 220 135 Prepaid Insurance 12 5 Inventory 291 178 Buildings and Equipment 386 353 Less: Accumulated Depreciation (122) (243) 824 564 Liabilities Accounts Payable 90 106 Accrued Expenses Payable 11 13 Notes Payable 73 0 Bonds Payable 210 0 Shareholders Equity Common Stock 403 403 Retained Earnings 37 42 824 564

Explanation / Answer

cash flow operating activities

Net income 68 Add depreciation expenses 69 Deduct: Increase in account receivable 85 Increase in prepaid insurance 7 Increase in inventory 113 Decrease in account payable 16 Decrease in accrued expenses payable 2 (223) (86)

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