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Principles of Accounting, Volume 1: Financial Accounting

16.4 Prepare the Completed Statement of Cash Flows Using the Indirect Method

Principles of Accounting, Volume 1: Financial Accounting16.4 Prepare the Completed Statement of Cash Flows Using the Indirect Method

In this section, we use the example of Virtual Co. to work through the entire process of preparing the company’s statement of cash flows using the indirect method. Virtual’s comparative balance sheet and income statement are provided as a base for the preparation of the statement of cash flows.

Review Problem: Preparing the Virtual Co. Statement of Cash Flows

Virtual Company Comparative Balance Sheet December 31. Assets: Cash, Accounts Receivable, Prepaid Insurance, Investments, Plant Assets, Accumulated Depreciation, and Total Assets for 2018, 2017, and Change (increase or decrease), respectively: $66,700, $83,250, $(16,550); 55,400, 54,220, 1,180; 2,400, 3,600, (1,200; 95,000, 75,000, 20,000; 356,000, 290,000, 66,000; (65,700), 36,700, (29,000); 509,800, 469,370, 40,430. Liabilities and Equity: Liabilities: Accounts Payable, Notes Payable, Total Liabilities for 2018, 2017, and Change (increase or decrease), respectively: $48,100, 47,300, 800; 160,000, 100,000, (25,000); 208,100, 232,300, (24,200). Equity: Common Stock, Retained Earnings, Total Equity, Total Liabilities and Equity, respectively: 130,000, 100,000, 30,000 increase; 171,700, 137,070, 34,630; 301,700, 237,070, 64,630; 509,800, 469,370, 40,430.
Figure 16.6 Comparative Balance Sheet. (attribution: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license)
Virtual Company. Income Statement, for the Year Ended December 31, 2018. Sales Revenue $433,000. Cost of Goods Sold 289,000. Gross Profit 144,000. Operating Expenses. Depreciation Expense 29,000. Insurance Expense 14,400. Other Operating Expenses 57,200. Total Operating Expenses 100,600. Operating Income 43,400. Other Revenue and Expenses: Gain on Sale of Land 17,500. Total Other Revenue and Expenses 17,500. Income before Income Tax 60,900. Income Tax Expense 18,270. Net Income 42,630.
Figure 16.7 Income Statement. (attribution: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license)

Additional Information

The following additional information is provided:

  1. Investments that originally cost $30,000 were sold for $47,500 cash.
  2. Investments were purchased for $50,000 cash.
  3. Plant assets were purchased for $66,000 cash.
  4. Cash dividends were declared and paid to shareholders in the amount of $8,000.

Directions:

Prepare the statement of cash flows (indirect method), for the year ended December 31, 2018.

Virtual Company. Statement of Cash Flows: Indirect Method. Year Ended December 31, 2018. Cash flow from operating activities: Net income $42,630. Adjustments to reconcile net income to net cash flow from operating activities: Depreciation $29,000. Gain on sale of plant assets (17,500). Accounts receivable decrease 1,180. Prepaid insurance decrease 1,200. Accounts payable increase 800. Net Cash Flow: Operating Activities 54,950. Cash flow from investing activities: Proceeds from sale of investments $47,500. Cost of investments purchased (50,000). Cost of new plant assets (66,000). Net cash flow: Investing activities ($68,500). Cash flow from financing activities: Payment of notes payable (principal) (25,000). Issuance of common stock 30,000. Payment of dividends (8,000). Net cash flow: Financing activities (3,000). Total cash flow decrease 16,550. Cash balance December 31, 2017 83,250. Cash balance December 31, 2018 $66,700.
Figure 16.8 Statement of Cash Flows. (attribution: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license)
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