Question

The comparative balance sheets for 2018 and 2017 are given below for Surmise Company. Net income for 2018 was $70 million.

SURMISE COMPANY
Comparative Balance Sheets
December 31, 2018 and 2017
($ in millions)
2018 2017
Assets
Cash $ 26 $ 32
Accounts receivable 84 96
Less: Allowance for uncollectible accounts (19 ) (4 )
Prepaid expenses 14 11
Inventory 132 115
Long-term investment 104 70
Land 88 88
Buildings and equipment 359 245
Less: Accumulated depreciation (122 ) (98 )
Patent 20 22
$ 686 $ 577
Liabilities
Accounts payable $ 14 $ 32
Accrued liabilities 3 15
Notes payable 38 0
Lease liability 107 0
Bonds payable 59 117
Shareholders’ Equity
Common stock 64 50
Paid-in capital—excess of par 259 205
Retained earnings 142 158
$ 686 $ 577

Required:
Prepare the statement of cash flows of Surmise Company for the year ended December 31, 2018. Use the indirect method to present cash flows from operating activities because you do not have sufficient information to use the direct method. You will need to make reasonable assumptions concerning the reasons for changes in some account balances. A spreadsheet or T-account analysis will be helpful. (Hint: The right to use a building was acquired with a seven-year lease agreement. Annual lease payments of $7 million are paid at January 1 of each year starting in 2018.) (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.)

Answer 1

Answer and Explanation:

The presentation of the cash flow statement is presented below:

Particulars                                              (in million)                                              

Cash flow from operating activities    

Net income $70

Adjustments made:  

Add: Depreciation expenses [$122 - $98] $24

Add: Bad debt expense [$19 -$4]                $15

Add: patent amortization expense [$22 - $20] $2

Add: decrease in Accounts receivable $12

Less: increase in Prepaid expenses ($3)

Less: increase in Inventory ($17)

Less: decrease in Accounts payable ($18)

Less: decrease in Accrued liabilities ($12)

Net cash flow from operating activities $73

Cash flow from Investing activities  

purchase of long term investment ($34)

purchase of Buildings and equipment ($7)

Net cash flow used by Investing activities ($41)

Cash flow from Financing activities  

Payment of cash dividend ($86)

Issuance of Notes payable 38

Proceed from Common stock [$14 + $54] $68

Payment of Bonds payable ($58)

Net Cash flow used by Financing activities ($38)

Decrease in cash ($6)

Add: cash in beginning,2017 $32

cash at end ,2018 $26

Non cash investing and financing activities:  

Acquired Building with a seven-year lease agreement $107

Working notes:

                           Retained earnings Account

To cash dividend (B/F) 86 By Balance b/d 158

To Balance c/d 142 By Net income 70

                              228                          228

                        Buildings and equipment Accounts

To Balance b/d 245  

To lease liability 107  

To cash (B/f) 7                   To Balance c/d 359

                                359                        359