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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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