2014 FASB Update Intermediate Accounting (15th Edition) Edit editionThis problem has been solved:Solutions for Chapter 23
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Accounting
A cash flow statement is one of the important and mandatory reports included in a company's financial statements. In a cash flow statement, only those transactions that are related to cash and cash equivalents are recorded. A cash flow statement is divided into three sections namely, the operating activities section, investing activities section, and the financing activities section.
Under the indirect method, cash flows from operating activities section is prepared using the net income (loss) as reported in the income statement as the base. Certain adjustments are then made to the net income (loss) for non-cash expenses and revenues, and non-cash losses and gains to get the amount of cash provided from operating activities.
The required statement of cash flows should be prepared using indirect method in the following manner:
| L Manufacturing Company | ||
| Statement of Cash Flows | ||
| For the year ended December 31, 2014 | ||
| Amount ($) | ||
| Cash flows from operating activities: | ||
| Net Income | 430,000 | |
| Adjustments to reconcile net income to net cash provided by operating activities | ||
| Depreciation | 880,000 | |
| Loss on sale of machinery | 24,000 | |
| Increase in receivable | (165,000) | |
| Decrease in inventory | 33,000 | |
| Increase in accounts payable | 20,000 | 792,000 |
| Net cash provided (used) by operating activities | 1,222,000 | |
| Cash flows from investing activities: | ||
| Purchase of machinery | (750,000) | |
| Sale of machinery | 270,000 | |
| Net cash provided (used) by investing activities | (480,000) | |
| Cash flows from financing activities: | ||
| Dividend Paid | (200,000) | |
| Net cash provided (used) by financing activities | (200,000) | |
| Net increase in cash | 542,000 | |
| Cash Balance January 1, 2014 | 130,000 | |
| Cash Balance December 31, 2014 | 672,000 |
Analysis
Compute free cash flow by subtracting capital expenditures during the year 2014 from the amount of cash provided by operating activities.
Free cash flow for L Manufacturing Company is
.
L Manufacturing Company does not have enough free cash flow to finance its investment plan in the next year. Therefore, it would be required to arrange finance for its growth plan from other sources.
Principles
The objectives of preparing the statement given in the question are as follows:
1. To provide information about the sources of cash.
2. To provide information about how the corporation’s cash has been used during the year.
3. To show reconciliation between the opening and the ending cash balances for the year.
Corresponding textbook
