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Question 1
Question 1. The comparative statements of financial position of Brown Inc. for 2018 and 2019 appear as follows. (100 points) Assets 2019 2018 234,000 132,000 Buildings Land Less: Accumulated depreciation-Buildings Inventory Accounts receivable Cash (102,000) 16,000 546,000 270,000 964,000 90,000 (66,000) 18,000 528,000 78,000 780,000 Total Equity and Liabilities Share capital--ordinary Retained earnings Accounts payable Total 600,000 228,000 136,000 964,000 550,000 122,000 108,000 780,000 Below is given additional information related to revenues, expenses and dividends for year 2019 Sales revenue 600,000 17,000 40,000 300,000 20,000 Sales discounts Gain from sale of Land Cost of goods sold Delivery expenses Depreciation of Office Buildings Advertising Expenses Other Administrative expenses Interest expense Sales returns and allowances Cash dividends paid on ordinary shares 36,000 15,000 33,500 20,000 65,000 27,500 Required
a) Prepare an Income Statement for 2019. (See chapter 4) (30 points) b) Using information from the comparative Statements of Financial Position and Income Statement prepare a Statement of Cash Flows for 2019. (See Chapter 5) (50 points) c) Explain in your own words the steps that you followed to prepare the Operating Section of the Statement of Cash Flows. (20 points)
Expert Solution
a.
INCOME STATEMENT
for 2019
| Account Titles | Amount $ | Amount $ |
| Gross Sales | $ 600,000 | |
| Less: Sales Discount | $ 17,000 | |
| Sales Return and Allowances | $ 65,000 | ( $ 82,000 ) |
| Net Sales | $ 518,000 | |
| Less : Cost of Goods Sold | ( $ 300,000 ) | |
| Gross Profit | $ 218,000 | |
| Operating Expenses : | ||
| Selling and Disbribution Expenses : | ||
| Delivery Expenses | $ 20,000 | |
| Advertising Expenses | $ 15,000 | |
| Administrative Expenses: | ||
| Depreciation on office building | $ 36,000 | |
| Other Administration Expenses | $ 33,500 | ( 104,500 ) |
| Net operating Income | 113,500 | |
| Non Operating Incomes & Expenses: | ||
| Gain from Sale of Land | $ 40,000 | |
| Interest Expense | ( $ 20,000 ) | $ 20,000 |
| Net Income | 133,500 |
b.
Cash Flow Statement
for 2019
| Cash Flow from Operating Activities : | ||
| Net Income | $ 133,500 | |
| Add: Non Cash Expenses : Depreciation | $ 36,000 | |
| Add: Non Operating Expense : Interest Expense | $ 20,000 | |
| $ 189,500 | ||
| Less: Non Operating Income: Gain from Sale of Land | ( $ 40,000 ) | |
| Cash from operations before working capital changes | $ 149,500 | |
| Changes in Working Capital: | ||
| Add: Decrease in Inventory ( $ 18,000 - 16,000 ) | $ 2,000 | |
| Less : Increase in Account Receivables ( $ 528,000 - 546,000) | ( $ 18,000 ) | |
| Add : Increase in Accounts Payables ( $ 136,000 - 108,000 ) | $ 28,000 | |
| Net Cash Flow from Operating Activities (A) | $ 161,500 | $ 161,500 |
| Cash Flow from Investing Activities : | ||
| Cash paid for purchase of building ( $ 132,000 - 234,000 ) | ($ 102,000 ) | |
| Cash Received from Sales of Land ( $ 90,000 + 40,000 ) | $ 130,000 | |
| Net Cash Flow from Investing Activities (B) | $ 28,000 | $ 28,000 |
| Cash Flow from Financing Activities : | ||
| Dividend Paid | ( $ 27,500 ) | |
| Cash recieved on issue of Common Stock ($ 600,000 - 550,000) | $ 50,000 | |
| Cash Paid for Interest Expenses | ( $ 20,000 ) | |
| Net Cash used for Finaning Activities (C) | $ 2,500 | $ 2,500 |
| Net Cash inflow During the Year ( D = A + B + C) | $ 192,000 | |
| Add: Opening Cash Balance (E) | $ 78,000 | |
| Closing Cash Balance (F = D + E ) | $ 270,000 |
c.
Steps that are followed in preparing operating Section of Cash flow statement.
1. Take Net Income for the year
- Firstly we will take net income for the year to start.
2. Adjust for Non Cash and Extra ordinary items :
- Any non cash expense , or non operating expenses are added to net income because non cash expenses such as depreciation does not include any outflow of cash .
- and non operating expenses such as interest expense are seperately shown in cash flow from financing activities.
- Deduct any Non operating income such as gain from sale of asset, which will be seperately considered in cash flows from investments.
3. Adjust for Changes in Working Capital :
- After the above adjustments , the income is before the changes of working capital.
- now we have to adjust the net income for any changes in working capital.
- Any increase in Account receivables will be reduced from net income, as it shows that some sales are not cash but on account. ( and vice versa ).
- Any Increase in Accounts payable is added in net income ( and vice versa ) as it shows that some expenses are not yet paid in cash.
4. the result is the cash flows from Operating Activities.
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