The comparative balance sheets for 2018 and 2017 are given below for Surmise Com
ID: 2595352 • Letter: T
Question
The comparative balance sheets for 2018 and 2017 are given below for Surmise Company. Net income for 2018 was $58 million
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 $7 million are paid at January 1 of each year starting in 2018.) (Enter your answers in millions (i.e., 10,000,000 should be entered as 10). Amounts to be deducted should be indicated with a minus sign.)
Comparative Balance Sheets
December 31, 2018 and 2017
($ 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
Explanation / Answer
Surmise Company Statement of Cash Flows (Indirect Method) For the Year ended Dec 31, 2018 ($ in Millions) Cash Flow from opearating activities: Net Income (Loss) 58 Add/(Less) non cash effects on operating activities Depreciation expense - Building & Equipment 17 Amortization Expenses - Patent 2 Bad Debt Expenses 9 Decrease in Accounts Receivables 6 Increase in Prepaid Expenses (5) Increase in Inventory (11) Decrease in Accounts Payable (12) Decrease in Accrued Liabilities (6) - Net Cash provided by operating activities 58 Cash flow from Investing Activities Purchase of Long Term Investment (28) Payment of Capital Lease - Building (7) Cash Flow / (used) from Investing activities (35) Cash Flow from Financing Activities Issue of Notes Payable 26 Redemption of Bonds Payable (46) Issue of Common Stock 50 Cash dividend paid (61) Cash Flow from Financing Activities (31) Net Increase / (Decrease) in Cash (8) Cash balance at the beginning Dec 31, 2017 98 Cash balance at the end Dec 31, 2018 90 Non-Cash Investing & Financing Activities Acquired Building by Capital lease 89