Question

The comparative balance sheets for 2024 and 2023 are given below for Surmise Company. Net income for 2024 was $66 million.

SURMISE COMPANY
Comparative Balance Sheets
December 31, 2024 and 2023
($ in millions)
2024 2023
Assets Cash $ 45 $ 49
Accounts receivable 82 92
Less: Allowance for uncollectible accounts (18) (5)
Prepaid expenses 13 9
Inventory 135 120
Long-term investment 92 60
Land 84 84
Buildings and equipment 344 235
Less: Accumulated depreciation (115) (94)
Patent 18 21
$ 680 $ 571
Liabilities Accounts payable $ 11 $ 27
Accrued liabilities 2 13
Notes payable 34 0
Lease liability 101 0
Bonds payable 57 111
Shareholders’ Equity Common stock 62 50
Paid-in capital—excess of par 255 205
Retained earnings 158 165
$ 680 $ 571
Required:
Prepare the statement of cash flows of Surmise Company for the year ended December 31, 2024. Use the indirect method to present cash flows from operating activities because you do not have sufficient information to use the direct method. You will need to make reasonable assumptions concerning the reasons for changes in some account balances. A spreadsheet or T-account analysis will be helpful. (Hint: The right to use a building was acquired with a seven-year lease agreement. Annual lease payments of $8 million are paid at January 1 of each year starting in 2024.)

Answer 1

The statement of cash flows for Surmise Company for the year ended December 31, 2024, using the indirect method for operating activities shows net cash provided by operating activities of $121 million. The company experienced a decrease in cash of $4 million during the period.

Step-by-step explanation:

The indirect method for the statement of cash flows starts with net income and adjusts for non-cash items and changes in operating assets and liabilities. To calculate net cash provided by operating activities, we begin with net income of $66 million. Then, adjustments are made for non-cash expenses like depreciation ($21 million increase) and changes in working capital.

Working capital changes involve alterations in current assets and liabilities. The changes include the increase in accounts receivable ($10 million decrease), the increase in the allowance for uncollectible accounts ($13 million decrease), the increase in inventory ($15 million increase), the increase in prepaid expenses ($4 million increase), the increase in accounts payable ($16 million decrease), the decrease in accrued liabilities ($11 million decrease), and the increase in the lease liability ($101 million increase due to the new lease agreement).

Additionally, the adjustment for the lease liability is considered, wherein the annual lease payments of $8 million are added back to the net income to reflect the cash outflow related to the lease. These calculations result in net cash provided by operating activities of $121 million and explain the $4 million decrease in cash during 2024.

Answer 2

Surmise Company

Statement of Cash Flows

For the Year Ended December 31, 2024

($ in millions)

• Operating Activities:

Net Income: $66

• Adjustments for Non-Cash Items:

Depreciation (Building and Equipment): $115 - $94 = $21

Allowance for Uncollectible Accounts: $18 - $5 = $13

Change in Prepaid Expenses: $13 - $9 = $4

Change in Inventory: $135 - $120 = $15

Change in Patent: $18 - $21 = -$3

Change in Accounts Receivable: $82 - $92 = -$10

Change in Accounts Payable: $11 - $27 = -$16

Change in Accrued Liabilities: $2 - $13 = -$11

Change in Lease Liability: $101 - $0 = $101

Change in Bonds Payable: $57 - $111 = -$54

Net Cash Provided by Operating Activities: $66 + $21 + $13 + $4 + $15 - $3 - $10 - $16 - $11 + $101 - $54 = $16 million

• Investing Activities:

Purchase of Long-Term Investment: $92 - $60 = -$32 million

Purchase of Land: $84 - $84 = $0

Purchase of Buildings and Equipment: $344 - $235 = -$109 million

Net Cash Used in Investing Activities: -$32 - $0 - $109 = -$141 million

• Financing Activities:

Payment of Notes Payable: $34 - $0 = -$34 million

Payment of Lease Liability: $0 - $8 = -$8 million

Repurchase of Common Stock: $62 - $50 = -$12 million

Issuance of Bonds Payable: $57 - $111 = $54 million

Net Cash Used in Financing Activities: -$34 - $8 - $12 + $54 = $0 million

Net Change in Cash: $16 (Operating) - $141 (Investing) + $0 (Financing) = -$125 million

• Cash at Beginning of Year: $49

• Cash at End of Year: $45

Step-by-step explanation:

Operating Activities:

Net income is adjusted for non-cash items and changes in working capital accounts.

The lease liability is added back as it represents a non-cash finance cost.

The change in bonds payable reflects financing activities and is subtracted.

Investing Activities:

The company invested in a long-term investment, land, and buildings/equipment.

Financing Activities:

The company paid off notes payable and lease liability, repurchased common stock, and issued bonds payable.

Net Change in Cash:

Sum of the cash flows from operating, investing, and financing activities.

Cash at End of Year:

Opening cash balance plus net change in cash.

Please note that the assumption regarding the lease liability payment schedule is crucial for accuracy. The annual lease payment of $8 million starting in 2024 has been considered. Adjustments may be needed based on additional information or different assumptions.