Comparative balance sheets for 2018 and 2017, a statement of income for 2018, an

Question

Comparative balance sheets for 2018 and 2017, a statement of income for 2018, and additional information from the accounting records of Red, Inc., are provided below.

Additional information from the accounting records:

a.During 2018, $249 million of equipment was purchased to replace $180 million of equipment (90% depreciated) sold at book value.

b. In order to maintain the usual policy of paying cash dividends of $69 million, it was necessary for Red to borrow $69 million from its bank.

Required:
Prepare the statement of cash flows of Red, Inc., using the direct method to report operating activities. (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.)

RED, INC.
Comparative Balance Sheets
December 31, 2018 and 2017 ($ in millions) 2018 2017 Assets Cash $ 43 $ 138 Accounts receivable 196 151 Prepaid insurance 9 4 Inventory 302 194 Buildings and equipment 438 369 Less: Accumulated depreciation (138 ) (259 ) $ 850 $ 597 Liabilities Accounts payable $ 106 $ 138 Accrued expenses payable 8 15 Notes payable 69 0 Bonds payable 154 0 Shareholders’ Equity Common stock 419 419 Retained earnings 94 25 $ 850 $ 597

Explanation / Answer

Solution:

Cash Flow from Operating Activities (Direct Method)

Cash receipts from customers (Refer Note 1)

$2,145

(-) Cash payments to merchandise (Note 2)

-$1,611

(-) Cash payment for Salaries expense (refer note 4)

-$547

(-) Income Taxes paid (Refer note 6)

-$116

Net Cash Used by Operating Activities

-$129

Note --- It is assumed that Insurance Expense is included in operating expenses. Hence insurance expenses are not considered separately.

Note 1 -- Cash receipts from Customers

Beginning Accounts Receivable

$151

Plus: Credit Sales made during the year

$2,190

Less: Ending Accounts Receivable

-$196

Cash Collected from Customers

$2,145

Note 2 -- Cash payment for merchandise

Beginning Accounts Payable

$138

Plus: Purchases made during the year (refer note 3)

$1,579

Less: Ending Accounts Payable

-$106

Cash Paid to Supplier during the year

$1,611

Note 3 -- Purchase made during the year

Cost of Goods Sold

$1,471

Plus: Ending Inventory

$302

Less: Beginning Inventory

-$194

Purchases made during the year

$1,579

Note 4 -- Cash paid for operating expense

Operating expenses incurred during the year

$540

Add: Beginning Balance

$15

Less: Ending balance

-$8

Cash paid for operating expense

$547

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Cash Flow from Operating Activities (Direct Method)

Cash receipts from customers (Refer Note 1)

$2,145

(-) Cash payments to merchandise (Note 2)

-$1,611

(-) Cash payment for Salaries expense (refer note 4)

-$547

(-) Income Taxes paid (Refer note 6)

-$116

Net Cash Used by Operating Activities

-$129

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