Question
In the example of the process of preparing a consolidated statement of cash flows where there has been a business combination presented on page 331
In the example of the process of preparing a consolidated statement of cash flows where there has been a business combination presented on page 331 of Advanced Accounting, which part did you find the most difficult? The most straight-forward?
Assume you are working for the parent company of a group with five subsidiaries. Of the information presented, which do you think would be the most difficult to obtain? Explain.
page 331 information from textbook
Company P and Subsidiary Company S Consolidated Balance Sheet December 31, 2016 and 2017 | ||
---|---|---|
Assets | 2017 | 2016 |
Cash and cash equivalents | $ 179,000 | $ 160,000 |
Inventory | 210,000 | 180,000 |
Accounts receivable | 154,000 | 120,000 |
Property, plant, and equipment | 1,336,250 | 1,256,250 |
Accumulated depreciation | (373,750) | (302,500) |
Goodwill | 125,000 | 125,000 |
Investment in Company E (20%) | 333,500 | 320,000 |
Total assets | $1,964,000 | $1,858,750 |
Liabilities and Stockholders Equity | ||
Accounts payable | $ 156,500 | $ 166,000 |
Bonds payable | 300,000 | 300,000 |
Noncontrolling interest | 106,700 | 100,750 |
Controlling interest: | ||
Common stock (par) | 200,000 | 200,000 |
Paid-in capital in excess of par | 652,000 | 652,000 |
Retained earnings | 548,800 | 440,000 |
Total liabilities and stockholders equity | $1,964,000 | $1,858,750 |
The following additional facts are available to aid in the preparation of a consolidated statement ofcash flows:
1. Company P purchased a new piece of equipment during 2017 for $80,000.
2. In 2017, Company P declared and paid $50,000 in dividends and Company S declared and paid $20,000 in dividends.
Illustration 6-1 is a worksheet approach to calculating a statement of cash flows under the indirect method. Explanations 1 through 6 use changes in balance sheet accounts to analyze cash from operations. This information is taken from the income statement and is implied from changes in current assets and current liabilities. Explanation 7 reflects the only investing activity in this example. Explanations 8 and 9 show the financing activities. The worksheet provides the information needed to develop the statement of cash flows that follows Illustration 6-1.
Illustration 6-1
Company P and Subsidiary Company S Worksheet for Analysis of Cash: Indirect Approach For Year Ended December 31, 2017 | |||||||
---|---|---|---|---|---|---|---|
| Account Change | Explanations |
| ||||
| Debit | Credit |
| Debit |
| Credit | Balance |
Inventory | 30,000 |
| (4) | 30,000 |
|
| 0 |
Accounts receivable | 34,000 |
| (3) | 34,000 |
|
| 0 |
Property, plant, and equipment | 80,000 |
| (7) | 80,000 |
|
| 0 |
Accumulated depreciation |
| 71,250 |
|
| (2) | 71,250 | 0 |
Goodwill | 0 |
|
|
|
|
| 0 |
Investment in Company E (20%) | 13,500 |
| (6) | 13,500 |
|
| 0 |
Accounts payable | 9,500 |
| (5) | 9,500 |
|
| 0 |
Bonds payable |
|
|
|
|
|
| 0 |
Noncontrolling interest |
| 5,950 | (9) | 4,000 | (1) | 9,950 | 0 |
Controlling interest: |
|
|
|
|
|
|
|
Common stock (par) |
|
|
|
|
|
| 0 |
Paid-in capital in excess of par |
|
|
|
|
|
| 0 |
Retained earnings |
| 108,800 | (8) | 50,000 | (1) | 158,800 | 0 |
| 167,000 | 186,000 |
| 221,000 |
| 240,000 |
|
Net change in cash | 19,000 | 0 |
| 19,000 |
| 0 |
|
Cash from Operations: |
|
|
|
|
|
|
|
Consolidated net income |
|
| (1) | 168,750 |
|
|
|
Depreciation expense |
|
| (2) | 71,250 |
|
|
|
Increase in accounts receivable |
|
|
|
| (3) | 34,000 |
|
Increase in inventory |
|
|
|
| (4) | 30,000 |
|
Decrease in accounts payable |
|
|
|
| (5) | 9,500 |
|
Equity income in excess of dividends |
|
|
|
| (6) | 13,500 |
|
Net cash provided by operating activities. |
|
|
| 153,000 |
|
|
|
Cash from Investing: |
|
|
|
|
|
|
|
Purchase of equipment |
|
|
|
| (7) | 80,000 |
|
Net cash used in investing activities |
|
|
|
|
| 80,000 |
|
Cash from Financing: |
|
|
|
|
|
|
|
Dividend payment to controlling interest |
|
|
|
| (8) | 50,000 |
|
Dividend payment to noncontrolling interest |
|
|
|
| (9) | 4,000 |
|
Net cash used in financing activities |
|
|
|
|
| 54,000 |
|
Net cash provided |
|
|
| 19,000 |
|
|
|
If the direct method of disclosing cash from operating activities is used, the cash flows from the operating activities section of the statement of cash flows would be prepared as follows:
Cash flows from operating activities: |
|
Cash from customers ($900,000 sales $34,000 increase in accounts receivable) | $ 866,000 |
Cash from investments (dividends received) | 2,000 |
Cash to suppliers ($525,000 cost of goods sold + $30,000 inventory increase + $9,500 decrease in accounts payable) | (564,500) |
Cash for general and administrative expenses | (150,500) |
Net cash provided by operating activities | $ 153,000 |
Company P and Subsidiary Company S Consolidated Statement of Cash Flows For Year Ended December 31, 2017 | ||
---|---|---|
Cash flows from operating activities: |
|
|
Consolidated net income |
| $168,750 |
Adjustments to reconcile net income to net cash: |
|
|
Depreciation expense | $ 71,250 |
|
Increase in accounts receivable | (34,000) |
|
Increase in inventory | (30,000) |
|
Decrease in accounts payable | (9,500) |
|
Equity income from Company E in excess of dividends |
|
|
Received | (13,500) |
|
Total adjustments |
| (15,750) |
Net cash provided by operating activities |
| $153,000 |
Cash flows from investing activities: |
|
|
Purchase of equipment |
| (80,000) |
Cash flows from financing activities: |
|
|
Dividend payment to controlling interest | $(50,000) |
|
Dividend payment to noncontrolling interest | (4,000) |
|
Net cash used in financing activities |
| (54,000) |
Net increase in cash and cash equivalents |
| $ 19,000 |
Cash and cash equivalents at beginning of year |
| 160,000 |
Cash and cash equivalents at year-end |
| $179,000 |
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