Question

The comparative balance sheets for 2018 and 2017 are given below for Surmise Company.

Net income for 2018 was $80 million.

SURMISE COMPANY Comparative Balance Sheets December 31, 2018 and 2017 ($ in millions)


2018 2017
Assets
Cash 55 58
Accounts receivable 89 106
Less: allowance for uncontrollable accounts (24) (4)
Prepaid expenses 19 16
Inventory 132 110
Long-term investment 89 50
Land 98 98
Buildings and equipment 400 270
Less accumulated depreciation (137) (108)
Patent 25 26
746 622

Liabilities
Accounts payable 19 42
Accrued liabilities 4 20
Notes payable 48 0
Lease liability 122 0
Bonds payable 64 132
Shareholders equity
Common stock 69 50
Paid-in capital-excess of par 261 205
Retained earnings 159 173
746 622

Required:
Prepare the statement of cash flows of Surmise Company for the year ended December 31, 2021. 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 $10 million are paid at January 1 of each year starting in 2021.) (Enter your answers in millions (i.e., 10,000,000 should be entered as 10). Amounts to be deducted should be indicated with a minus sign.)

Answer 1

To prepare the statement of cash flows for Surmise Company, we will use the indirect method. The statement will include cash flows from operating, investing, and financing activities. We need to adjust net income for non-cash expenses and changes in working capital and consider changes in long-term investments, notes payable, and bond payable.

Step-by-step explanation:

To prepare the statement of cash flows for Surmise Company, we will use the indirect method. The statement will include cash flows from operating, investing, and financing activities. Here's a breakdown of each section:

Operating Activities:

Net income for 2018 was $80 million. To calculate cash flows from operating activities, we need to adjust net income for non-cash expenses and changes in working capital. We see that the allowance for uncontrollable accounts increased by $20 million, which means we have to deduct that amount. Prepaid expenses increased by $3 million, which means we have to deduct that amount as well. The change in accounts receivable and inventory balances also need to be considered.

Investing Activities:

The long-term investment increased by $39 million, which means we have to deduct that amount. There were no changes in patents or land balances, so no adjustments are needed for those.

Financing Activities:

There are changes in notes payable and bond payable, which need to be considered. We can assume that $48 million was borrowed through notes payable, and $68 million was repaid on bond payable.

By including these adjustments, we can calculate the cash flows from each activity and prepare the statement of cash flows for Surmise Company.

Answer 2

Step-by-step explanation:

Net income - (159-173) (14)

Add back depreciation (137-108) 29

Add back amortization ( 26-25) 1

Operating profit 16

Increase in noncollectible account (24-4) 20

Increase in note payable (48-0) 48

Decrease in receivable (106-89) 17

Decrease in payable (42-19) (23)

Decrease in accrued liabilities ((20-4) (16)

Increase in prepaid expenses (19-16) (3)

Increase in inventory (132-110) (22)

21

Operating profit before tax 37

Financing activities

Common stock (69-50) 19

Issue of paid capital (261-205) 56

Lease income (122-0) 122

Redemption of bonds (132-64) (68)

Cash flow from financing activities 129

Investing activities

Long term investment ( 89-50) (39)

Building and equipment (400-270) ( 130)

Cash flow from investing activities (169)

Increase in cash ( 3)

Cash at the beginning of the year 58

Cash at year end 55