EXPERT Q&A SOLUTIONS

ANSWER

General guidance
Concepts and reason

Cash Flow Statement: This statement provides a complete analysis of the liquidity of
the company and also shows the financial position. It shows all the cash transaction
that gets occurred during the fiscal year.

Cash flow statement is the final statement which is prepared after the balance
sheet. It consists of the transactions which affect the cash position of the company.

Fundamentals

Operating Activities: These activities are related to the general business or

Financing Activities: These activities are the activities related to the dealing in the
sale and purchase of the items which are held in the business for a longer duration.

Investing activities: These activities are related to how the entity arranges its funds
from the business.

Inventory: It is goods of the company which can be in forms of raw material, work in
progress and finished goods. The company held these goods for sale in the ordinary
course of business it shows the capability of the company to manufactured goods in
what quantity it is showed in the asset side of balance sheet.

Accounts Payable: The amount owed by a business to its supplier is known as

Account Receivable: The amount receivable for service rendered and goods
supplied to the customer on credit is known as account receivable.

Net Income: The resultant amount after reducing all expenses of the company
whether direct or indirect for the period from all revenues is termed as net income.

Depreciation: It refers to the reduction in the book value of the asset due to
obsolesce, use, wear and tear. It is a non-cash expense for the organization
Common stock: These are the shares that are issued by the company against the
money invested by the shareholders in the company. The common stockholders are
the real owners of the company; they have a right on the dividend that is
distributed by the company.

Cash Inflow: Cash inflow can be termed as the flow of funds into the business from
sales of goods and services, and investments. Cash inflow is necessary for the
smooth flow of business activities. If there are no cash inflows then the business
would not be able to make payment to its suppliers and will not survive for long.

Cash Outflows: In accounting terms, cash outflows mean the transfer of funds by a
business to its employees, suppliers, and creditors. Outflows of cash also take place
while purchasing long-term fixed assets and investments are purchased, or when
settlements are made.

Retained earnings: It is that portion of the profit that is not distributed as dividends
but retained in the business to reinvest the money. The statement of retained
earnings is prepared to arrive at the closing balance of the retained earnings as on
the balance sheet date.

Dividend: It is the amount of income earned by the stockholders in return for their
investment. It is the distribution of profits earned during a specified period. The
payment is made generally in the form of cash. Dividend account is of temporary
nature. It is maintained until the dues have been cleared.

Step-by-step
Step 1 of 2

Compute the change in current operating assets and liabilities using the equation as
shown below:

Working Notes:

Compute the increase in accounts payable using the equation as shown below:
Thus, the increase in accounts payable is $40,000.

Compute the increase in accounts receivable using the equation as shown below:

Thus, the increase in accounts receivable is $50,000.

Compute the increase in inventory using the equation as shown below:

Thus, the increase in inventories is $20,000.

Compute the increase in dividends payable using the equation as shown below:

Thus, the increase in dividends payable is $5,000.

Compute the decrease in accrued expenses using the equation as shown below:

Thus, the decrease in accrued expenses is $5,000.

Explanation | Hint for next step

Cash is increased when current liability increases or current asset decreases. Cash
is decreased when current liability decreases or current asset increases.
Depreciation or loss on the sale of any asset is a non-cash expense hence it will be
added to net income to get operating cash.
Profit on sale of asset or investment is a noncash profit and hence will be deducted
from operating income. Increase in dividends payable is computed by subtracting
opening dividends payable from closing dividends payable.

Step 2 of 2

Prepare the statement of cash flow activities using MS Excel as shown below:

Working Notes:

Compute the adjustments to reconcile net income to net cash flow from operating
activities using the equation as shown below:
Hence, adjustments to reconcile net income to net cash flow from operating
activities are $495,000.

Compute the net cash flow from operating activities using the equation as shown
below:

Hence, net cash flow from operating activities is $495,000.

Compute the net cash flow from investing activities using the equation as shown
below:

Hence, the net cash flow from investing activities is -$525,000.

Compute the net cash flow from financing activities using the equation as shown
below:

Hence, the net cash flow from financing activities is $35,000.

Compute the net increase in cash using the equation as shown below:
Hence, the net increase in cash is $5,000.

Explanation

The statement of cash flow is created by computing the sum of net cash flow from
the three activities, that is, Operating activity, investing activity and Financing
activity. The net increase or decrease in the cash balance is added to the opening
balance to arrive at the closing balance of the cash.

Net increase in cash flow is determined by computing cash flow from all the three
activities of operating, investing and financing activities and then adding them. The
net increase in cash flow shall be added to the cash at the beginning of the year
which will be equal to cash at the end of the year.

Answer