The comparative balance sheets for 2018 and 2017 are given below for Surmise Com
ID: 2539008 • Letter: T
Question
The comparative balance sheets for 2018 and 2017 are given below for Surmise Company. Net income for 2018 was $58 million.
SURMISE COMPANY
Comparative Balance Sheets
December 31, 2018 and 2017
($ in millions)
2018 2017
Assets
Cash $ 90 $ 98
Accounts receivable 78 84
Less: Allowance for uncollectible accounts (15 ) (6 )
Prepaid expenses 10 5
Inventory 121 110
Long-term investment 63 35
Land 76 76
Buildings and equipment 311 215
Less: Accumulated depreciation (103 ) (86 )
Patent 13 15
$ 644 $ 546
Liabilities
Accounts payable $ 7 $ 19
Accrued liabilities 2 8
Notes payable 26 0
Lease liability 89 0
Bonds payable 53 99
Shareholders’ Equity
Common stock 58 50
Paid-in capital—excess of par 247 205
Retained earnings 162 165
$ 644 $ 546
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 $7 million are paid at January 1 of each year starting in 2018.) (Enter your answers in millions (i.e., 10,000,000 should be entered as 10). Amounts to be deducted should be indicated with a minus sign.)
Explanation / Answer
Answer:
Surmise Company
Statement of Cash Flows
For year ended December 31, 2018 ($ in millions)
Cash flows from operating activities:
Net income
$58
Adjustments for noncash effects:
Depreciation expense
17
Bad debt expense
9
Patent amortization expense
2
Changes in operating assets and liabilities:
Decrease in accounts receivable
6
Increase in inventory
-11
Decrease in accounts payable
-12
Increase in prepaid expenses
-5
Decrease in accrued liabilities
-6
0
Net cash flows from operating activities
$58
Cash flows from investing activities:
Purchase of long-term investment
-28
Net cash flows from investing activities
-28
Cash flows from financing activities:
Issuance of note payable
26
Retirement of bonds payable
-46
Sale of common stock
50
Annual Leae payment
-7
Payment of cash dividends
-61
Net cash flows from financing activities
-38
Net increase in cash
($8)
Cash balance, January 1
98
Cash balance, December 31
$90
Noncash investing and financing activities:
Acquired buildings by capital lease
$89
Working notes for the above answer is as under
Spreadsheet for the Statement of Cash Flows
Dec.31
Changes
Changes
Dec. 31
2018
Debits
Credits
2017
Balance Sheet
Assets:
Cash
90
16
8
98
Accounts receivable
78
5
6
84
Less: Allowance
-15
3
9
-6
Prepaid expenses
10
8
5
5
Inventory
121
6
11
110
Long-term investment
63
10
28
35
Land
76
76
Buildings and equip.
311
11
96
215
Less: Acc. depreciation
-103
2
17
-86
Patent
13
4
2
15
644
546
Liabilities:
Accounts payable
7
7
12
19
Accrued liabilities
2
9
6
8
Notes payable
26
12
26
0
Lease liability
89
X
11
89
0
Bonds payable
53
13
46
99
Shareholders' Equity:
Common stock
58
14
8
50
Paid-in capital-ex. of par
247
14
42
205
Retained earnings
162
15
61
1
58
165
644
546
Surmise Company
Statement of Cash Flows
For year ended December 31, 2018 ($ in millions)
Cash flows from operating activities:
Net income
$58
Adjustments for noncash effects:
Depreciation expense
17
Bad debt expense
9
Patent amortization expense
2
Changes in operating assets and liabilities:
Decrease in accounts receivable
6
Increase in inventory
-11
Decrease in accounts payable
-12
Increase in prepaid expenses
-5
Decrease in accrued liabilities
-6
0
Net cash flows from operating activities
$58
Cash flows from investing activities:
Purchase of long-term investment
-28
Net cash flows from investing activities
-28
Cash flows from financing activities:
Issuance of note payable
26
Retirement of bonds payable
-46
Sale of common stock
50
Annual Leae payment
-7
Payment of cash dividends
-61
Net cash flows from financing activities
-38
Net increase in cash
($8)
Cash balance, January 1
98
Cash balance, December 31
$90
Noncash investing and financing activities:
Acquired buildings by capital lease
$89