PREPARE necessary disclosures, including disclosures about noncash financing and
ID: 2330560 • Letter: P
Question
PREPARE necessary disclosures, including disclosures about noncash financing and investing activities for Statement of Cash Flows!
Smart Construction Company Statement of Cash Flows For Year Ended June 30, 2017 Operating Activities: Net Income $ 124,780 Adjustments for noncash income items: Depreciation Expenses $ 3,000 Loss on Sale of Building $ 1,500 Amortization Discount on Bond $ 45 Bad Debt $ 3,500 Gain on Conversion of Preferred Stock $ (4,000) Gain on Repayment of Note Payable $ (1,000) Shared Income from Subsidiary $ (6,000) Dividend Received from Subsidiary $ 2,000 Provision for Pension $ 350,000 Adjustments from cash flow effect from working capital items: Increase in Accounts Receivable $ (30,000) Increase of Billings on Construction in Progress $ (61,250) Decrease in Prepaid Expenses $ 35,000 Increase in Income Tax $ 10,975 Increase in Accounts Payable $ 122,500 Increase in Interest Payable $ 3,600 Decrease in Pension Liability $ (100,000) Net cash provided (used) by operating activities $ 454,650 Investing activities: Marketable Security $ (1,300) Investments (long-term) $ (9,500) Lease Obligation Paid $ (2,000) Sale of Building $ 26,000 Net cash provided (used) by investing activities $ 13,200 Financing Activities: Common Stock Issued $ 8,000 Bonds Payable $ 43,650 Dividend Paid $ (650) Net cash provided (used) by financing activities $ 51,000 Net Cash Flow $ 518,850 Cash, June 30, 2016 $ 361,700 Cash, June 30, 2017 $ 880,550Explanation / Answer
1. Disclosures about noncash item :
a.)Depreciation Expenses : Depreciation Expenses is a non cash item and this is debit to profit and loss accoount because on account of Depreciation debiting to P/L,there is no inflow and outflow of cash. hence depreciation is add back too net income to calculate net cash used/flow from operating activities. Journal entrires for Depreciation is : Depreciation account Debit
To Fixed Assest Credit
b.)Loss on Sale of Building: Loss on sale of building is debit to P/L account but by debiting loss to profit and loss account we have not reecived or we have not given cash to anyone i.e : there is no inflow and outfow of actual cash. hence loss on sale of building is add back too net income to calculate net cash used/flow from operating activities. through below journal entries we can understabd this in better way. Journal entrires for Loss on Sale of Building is : Profit and loss account(Debit)
To Loss on sale of assets(Credit)
Journal entrires for Sale of Building is : Cash/Bank account (Debit)
Loss on sale of assets(debit)
To Building account(Credit)
This is very clear that on loss of sale of building no cash is in or no cash is out and cash received from sale of building is investing activity and Loss on Sale of Building is non cash item.
c.)Amortization Discount on Bond: Amortization for Discount is just amortizartion of miscellaneous expenditure into profit or loss. from amortization Smart Construction Company has not received any cash nor it has given cash. hence Amortization of Discount on Bond is non cash item and this is add back too net income to calculate net cash used/flow from operating activities. Journal entrires for Amortization of discount is : Profit and loss account (Debit)
To Amortization of discount (Credit)
d.)Bad Debt : Bad Debt is debit to profit and loss account as an expense but on account of occuring bad dabts orgnasaition has not spend any cash on the same. Bad Debt is just like a loss on account of not collecting our account receivable. Journal entry for Bad Debt is : Bad debts account (Debit)
To Debtors account (Credit)
Transfer of bad debts to Profit and loss account : Profit and loss account (Debit)
To Bad debts (Credit)
hence Bad Debts is non cash item and this is add back too net income to calculate net cash used/ flow from operating activities
e.)Gain on Conversion of Preferred Stock/Gain on Repayment of Note Payable : Gain on Conversion of Preferred Stock is non cash item bacause on account of conversion there is no inflow or outflow of cash. Gain on Repayment of Note Payable is non cash item because cash paid for Repayment of Notes payable has already been included as financing activity while preparing cash flow statement.
f.)Shared Income from Subsidiary : Shared Income from Subsidiary is disallowed item in calcluating net cash used/flow from operating activities becasue shared income from subsidiary is included as investing activity while preparing cash flow statement as this is income of Smart Construction Company that has earned on account of investment made in subsidiaries.
g.)Dividend Received from Subsidiary : Dividend Received from Subsidiary is disallowed item in calcluating net cash used/flow from operating activities becasue Dividend Received from subsidiary is included as investing activity while preparing cash flow statement as this is income of Smart Construction Company that has earned on account of purchasing shares of subsidiary company.
h.) Provision for Pension : Provisions are less certain, but they are not completely uncertain. Companies elect to make provisions for future obligations where the specific amount or timing is unknown and provision for pension is non cash item because because on account of making a provsion there is no inflow and outflow of cash. hence Provision for pension is add back to net income to calculate net cash used/flow from operating activities. Journal entrires for provison is :
Profit and loss account (Debit)
To Provision for Pension account(Credit)
hence Provision for Pension is non cash item and this is add back too net income to calculate net cash used/ flow from operating activities.
2. Disclosures about Investing activities:
a.)Marketable Security : Company made investment to earn income from ideal cash which is lying in company account. cash used in purchasing Securiites from market is short term investmen. hence Marketable Security is investing activity.
b.) Investments (long-term) : To gain benrfit in long term Company made long term investment to earn income from ideal cash which is lying in company account. cash used in making long term investment is called long term investment. hence Investments (long-term) is investing activity.
c.)Lease Obligation Paid : Assets taken on Lease is always treated as investments. hence Lease Obligation Paid is investing activity.
d.) Sale of Building : Building is purchased to run a business and to derive economic benefit in future by suing the same. every organiastion invest in building to smooth runnning of business hence Sale of Building is investing actvity.
3.Disclosures about Financing activities:
a.)Common Stock Issued : Finance is like blood in human being. every company get cash from ublic on account of issuing our shares in market hence Common Stock Issued i.e: equiry shares issued to get money from genral public is part of financing activity.
b.) Bonds Payable: Bonds is like a debenture. company issued debentures or bond to public get finance and fixed interest is paid by the company on bonds or debentures. Payment of Bonds payable is part of financing activity.
C).Dividend Paid : Dividend is Paid on Common Stock/Equity shares Issued by the organisation. above mentioned Common Stock Issued is part of financing activity. hence dividend paid on the same is also a part of financing activity.
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