Locate the errors in the following statement of cash flows. The cash balance at
ID: 2550271 • Letter: L
Question
Locate the errors in the following statement of cash flows. The cash balance at the beginning of the year was $240,000. The cash balance at the end of the year may be incorrect. Also, other amounts may need to be changed from positive to negative, or from negative to positive.
Shasta Inc.
Statement of Cash Flows
For the Year Ended December 31, 2016
1
Cash flows from operating activities:
2
Net income
$360,000.00
3
Adjustments to reconcile net income to net cash flow from operating activities:
4
Depreciation
100,800.00
5
Gain on sale of investments
17,280.00
6
Changes in current operating assets and liabilities:
7
Increase in accounts receivable
27,360.00
8
Increase in inventories
(36,000.00)
9
Increase in accounts payable
(3,600.00)
10
Decrease in accrued expenses payable
(2,400.00)
11
Net cash flow from operating activities
$463,440.00
12
13
Cash flows from investing activities:
14
Cash received from sale of investments
$240,000.00
15
Less: Cash paid for purchase of land
$259,200.00
16
Less: Cash paid for purchase of equipment
432,000.00
691,200.00
17
Net cash flow used for investing activities
(451,200.00)
18
19
Cash flows from financing activities:
20
Cash received from sale of common stock
$312,000.00
21
Less: Cash paid for dividends
132,000.00
22
Net cash flow from financing activities
180,000.00
23
Increase in cash
$47,760.00
24
Cash at the end of the year
192,240.00
25
Cash at the beginning of the year
$240,000.00
Shasta Inc.
Statement of Cash Flows
For the Year Ended December 31, 2016
Explanation / Answer
Answers
A. Answer the following questions. Use your answers to help you in locating errors for the statement of cash flows presented in the Instructions.
Item
Yes or No
1.
Depreciation should be added to net income.
Yes
Reason: Depreciation is non cash expenses and must be deducted while calculating net income.
2.
Gain on sale of investments should be added to net income.
No
Reason: It should be deducted, as it is non operating income and must be added to net income. So, now it will be deducted.
3.
Increases in accounts payable should be deducted from net income.
No
Reason: It will be added to net income, as increase in accounts payable means we are not making payment in cash, and enhance cash availability with business. So it causes cash inflow.
4.
Increases in accounts receivable should be added to net income.
No
Reason: It will be deducted from net income, as increase in accounts receivable means we are not getting cash, and reduce cash availability and inflow with business. So it causes cash outflow.
5.
Cash paid for property, plant, and equipment should be deducted under investing.
Yes
Reason: It means purchase of for property, plant, and equipment, so causes cash outflow.
6.
Cash received from sale of common stock should be added under financing.
Yes
Reason: It means issue of common stock, so causes cash inflow.
7.
Cash paid for dividends should be added under financing.
No
Reason: It should be deducted from financing activities as, it causes cash outflow.
B. Choose the correct amount description and enter the corrected amounts below. Use the minus sign to indicate cash outflows, cash payments, and decreases in cash.
Shasta Inc.
Statement of Cash Flows
For the Year Ended December 31, 2016
1
Cash flows from operating activities:
2
Net income
$360,000.00
3
Adjustments to reconcile net income to net cash flow from operating activities:
4
Add: Depreciation
100,800.00
5
Less: Gain on sale of investments
-17,280.00
6
Changes in current operating assets and liabilities:
7
Less: Increase in accounts receivable
-27,360.00
8
Less: Increase in inventories
-36,000.00
9
Add: Increase in accounts payable
3,600.00
10
Less: Decrease in accrued expenses payable
-2,400.00
11
Net cash flow from operating activities
$381,360.00
12
13
Cash flows from investing activities:
14
Cash received from sale of investments
$240,000.00
15
Less: Cash paid for purchase of land
-259,200.00
16
Less: Cash paid for purchase of equipment
-432,000.00
-691,200.00
17
Net cash flow used for investing activities
(451,200.00)
18
19
Cash flows from financing activities:
20
Cash received from sale of common stock
$312,000.00
21
Less: Cash paid for dividends
-132,000.00
22
Net cash flow from financing activities
180,000.00
23
Increase in cash
$110,160.00
24
Cash at the beginning of the year
240,000.00
25
Cash at the end of the year
$350,160.00
C. Based on the corrected amounts above and the fact that the correct cash balance at the beginning of the year was $240,000, enter the corrected amounts for the increase in cash and the cash balance at the end of the year.
Increase in cash
$110,160.00
Cash at the beginning of the year
240,000.00
Cash at the end of the year
$350,160.00
Item
Yes or No
1.
Depreciation should be added to net income.
Yes
Reason: Depreciation is non cash expenses and must be deducted while calculating net income.
2.
Gain on sale of investments should be added to net income.
No
Reason: It should be deducted, as it is non operating income and must be added to net income. So, now it will be deducted.
3.
Increases in accounts payable should be deducted from net income.
No
Reason: It will be added to net income, as increase in accounts payable means we are not making payment in cash, and enhance cash availability with business. So it causes cash inflow.
4.
Increases in accounts receivable should be added to net income.
No
Reason: It will be deducted from net income, as increase in accounts receivable means we are not getting cash, and reduce cash availability and inflow with business. So it causes cash outflow.
5.
Cash paid for property, plant, and equipment should be deducted under investing.
Yes
Reason: It means purchase of for property, plant, and equipment, so causes cash outflow.
6.
Cash received from sale of common stock should be added under financing.
Yes
Reason: It means issue of common stock, so causes cash inflow.
7.
Cash paid for dividends should be added under financing.
No
Reason: It should be deducted from financing activities as, it causes cash outflow.
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