6P - Intermediate Accounting (Kieso)

Question

Lansbury Inc. had the following balance sheet on December 31, 2016.

LANSBURY INC.
BALANCE SHEET
DECEMBER 31, 2016
Cash	\(20,000	Account payable	\)30,000
Accounts receivables	21,200	Note payable	41,000
Investment	32,000	Common stock	100,000
Plant assets (net)	81,000	Retained earnings	23,200
Land	40,000
	\(194,200		\)194,200

 

During 2017, the following occurred. 

1. Lansbury Inc. sold part of its debt investment portfolio for \(15,000. This transaction resulted in a gain of \)3,400 for the firm. The company classifies these investments as available for sale. 

2. A tract of land was purchased for \(13,000 cash. 

3. Long-term notes payable in the amount of \)16,000 were retired before maturity by paying \(16,000 cash. 

4. An additional \)20,000 in common stock was issued at par. 

5. Dividends of \(8,200 were declared and paid to stockholders. 

6. Net income for 2017 was \)32,000 after allowing for depreciation of \(11,000. 

7. Land was purchased through the issuance of \)35,000 in bonds. 

8. At December 31, 2017, Cash was \(37,000, Accounts Receivable was \)41,600, and Accounts Payable remained at $30,000. 

Instructions 

(a) Prepare a statement of cash flows for 2017. 

(b) Prepare an unclassified balance sheet as it would appear at December 31, 2017.

(c) How might the statement of cash flows help the user of the financial statements? Compute two cash flow ratios.

Step-by-Step Solution

Answer

Net increase in cash is equal to $17,000.

Definition of Statement of Cash Flow

The statement describing the ability of the business entity to generate cash and all the business entity's transactions that increase or decrease cash balance is known as the statement of cash flow.

Statement of Cash Flow

Particular	Amount $	Amount $
Opening Cash balance
Cash flow from operations:
Net income	$32,000
Add: Adjustment for reconciling net income to net cash
Depreciation expenses	11,000
Increase in accounts receivables	(20,400)
Gain from sale of investment available for sale	(3,400)
Net Cash flow from operation		$19,200
Cash flow from investing activities:
Land purchased for cash	(13,000)
Sale of available for sale investment	15,000
Net cash flow from investing		2,000
Cash flow from financing activities:
Cash dividend	(8,200)
Issue of common stock	20,000
Net cash flow from finance		(4,200)
Net increase or decrease in cash		17,000
Add: opening cash balance		20,000
Ending cash balance		$37,000

Unclassified Balance sheet

LANSBURY INC.
BALANCE SHEET
DECEMBER 31, 2016
Cash	$37,000	Account payable	30,000
Accounts receivables	41,600	Note payable	25,000
Investment (17,000 + 3,400)	20,400	Bond payable	35,000
Plant assets (net)	70,000	Common stock	120,000
Land	88,000	Retained earnings	47,000
	$257,000		$257,000

Cash Flow Ratios

Importance of statement of cash flow: A statement of cash flow allows the financial statement users to determine the portion of the income generated in cash, cash availability, and the ability to generate cash in the future period.

Cash flow ratios:

$\begin{array}{rcl}\mathrm{Current} \mathrm{cash} \mathrm{debt} \mathrm{coverage}& =& \frac{\mathrm{Cash} \mathrm{flow} \mathrm{from} \mathrm{operating} \mathrm{activities}}{\mathrm{Average} \mathrm{current} \mathrm{liabilities}}\\ & =& \frac{\$19,200}{{\displaystyle \frac{\$30,000+\$30,000}{2}}}\\ & =& 0.64\end{array}$

$\begin{array}{rcl}\mathrm{Cash} \mathrm{debt} \mathrm{coverage}& =& \frac{\mathrm{Cash} \mathrm{flow} \mathrm{from} \mathrm{operation} }{\mathrm{Total} \mathrm{liabilities}}\\ & =& \frac{\$19,200}{\$71,000}\\ & =& 0.27\end{array}$