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Arduous Company's comparative balance sheets for 2016 and 2015 and the income statement for 2016...

Question:

Arduous Company's comparative balance sheets for 2016 and 2015 and the income statement for 2016 are given below . Additional information from Arduous's accounting records is provided also.

ARDUOUS COMPANY Comparative Balance Sheets December 31, 2016, and 2015 ($ in millions)

Assets 2016 2015
Cash $124 $85
Accounts receivable 194 202
Investment revenue receivable 10 8
Inventory 213 204
Prepaid insurance 8 14
Long-term investment 168 129
Land 204 154
Buildings and equipment 416 408
Less: accumulated depreciation (100) (128)
Patent 37 39
$1,274 $1,115
Liabilities
Accounts payable $54 $73
Salaries payable 10 20
Bond interest payable 12 8
Income tax payable 16 21
Deferred income tax liability 19 12
Notes payable 25 0
Lease liability 86 0
Bonds payable 219 283
Less: Discount on bonds (26) (34)
Shareholders' equity
Common stock 434 414
Paid-in capital - excess of par 99 89
Preferred stock 79 0
Retained earnings 260 229
Less: treasury stock (13) 0
$1,274 $1,115

ARDUOUS COMPANY Income Statement for year ended December 31, 2016 ($ in millions)

Revenues and gain
Sales revenue $439
Investment revenue 15
Gain on sale of treasury bills 2 $459
Expenses and loss
Cost of goods sold 184
Salaries expense 77
Depreciation expense 11
Patent amortization expense 2
Insurance expense 11
Bond interest expense 32
Loss on machine damage 26
Income tax expense 40 383
Net income $73

Additional information from the accounting records:

a. Investment revenue includes Arduous Company's $10 million shares of the net income of Demur Company, an equity method investee.

b. Treasury bills were sold during 2016 at a gain of $2 million. Arduous Company classifies its investments in Treasury bills as cash equivalents.

c. A machine originally costing $78 million that was one-half depreciated was rendered unusable by a flood. Most major components of the machine were unharmed and were sold for $13 million.

d. Temporary differences between pretax accounting income and taxable income caused the deferred income tax liability to increase by $7 million.

e. The preferred stock of Tory Corporation was purchased for $29 million as a long-term investment.

f. Land costing 450 million was acquired by issuing $25 million cash and a 10%, four-year, $25 million note payable to the seller.

g. The right to use a building was acquired with a 15-year lease agreement; present value of lease payments, $86 million.

h. $84 million of bonds were retired at maturity

i. In February, Arduous issued a 4% stock dividend (4 million shares). The market price of the $5 par value common stock was $7.50 per share at a time.

j. In April, 1 million shares of common stock were repurchased as treasury stock at a cost of $13 million.


Required

1. Prepare the statement of cash flows for Arduous Company using the indirect method.

Statement of Cash Flow:

The statement includes three sections; operating, investing, and financing activities sections. The statement of cash flow mixes the activity of the current income statement and the last two balance sheets to reconcile the changes in cash accounts over two periods.

Answer and Explanation:


The operating section starts with net income from the profit and loss statement and adds back depreciation, amortization, and other non-cash expenditures to determine cash income or loss. The report then accounts for changes in working capital (current assets and current liabilities) items from the balance sheet. The investing activity section accounts for adjustments in non-current assets whereas the financing activities segment accounts for changes in non-current liabilities and equity sections of the balance sheets. Once all sections of the statement are completed the combined net effects are then combined with beginning cash flow to determine ending cash balances.


Arduous Company

Statement of Cash Flow

For the year ending December 31, 2016

Cash flows from operating activities
Profit 73
Adjustments for:
Depreciation Expense 11
Amortization expense 2
Working capital changes:
(Increase) / Decrease in trade and other receivables 8
(Increase) / Decrease in inventories -9
(Increase) / Decrease in Prepaid Expenses 6
Increase / (Decrease) in Accounts Payable -19
Increase / (Decrease) in Salaries Payable -10
Increase / (Decrease) in Interest Payable 4
Increase / (Decrease) in Income Tax Payable 2
Net cash generated (used) from operating activities 68
Cash flows from investing activities
Sale (Purchase) of Property, Plant, and Equipment -97
Sale (Acquisition) of portfolio investments -41
Net cash generated (used) from investing activities -138
Cash flows from financing activities
Proceeds (Repurchase) from issue of preferred stock 79
Proceeds (Repurchase) from issue of common stock 30
Proceeds (Repurchase) from repurchase of treasury stock -13
Proceeds (payments) from eEase Payable 86
Proceeds (payments) from Bond Payable -56
Proceeds (payments) from Note Payable 25
(Dividends) Injections -42
Net cash generated (used) from financing activities 109
Net increase in cash and cash equivalents 39
Cash and cash equivalents at beginning of period 85
Cash and cash equivalents at end of period 124

Learn more about this topic:

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Using the Statement of Cash Flows for Decision Making

from Accounting 101: Financial Accounting

Chapter 12 / Lesson 5
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