Module 5 Q1: Tenisa Is Working On Her Account

Sheet1module 5 Q1 30 Points Tenisa Is Working On Her Accounting Ski

Tenisa is working on her accounting skills again and wants to finish the cash flow statement for the yearend 2018 before the accountant does. In 2018, Comfy Home paid for all purchases of long-term fixed assets with cash. The company did not take out any new loans, but paid off part of an existing loan with cash. Please use the information below to complete the cash flow statement for Tenisa using the indirect method. (see below the financial statements for questions 2-5 of this assignment)

Paper For Above instruction

Comfy Home Company's financial statements for the year ending December 31, 2018, show significant changes from the previous year due to various operational, investing, and financing activities. To accurately prepare the cash flow statement, it is essential to analyze these components, especially under the indirect method, which adjusts net income for changes in working capital and non-cash expenses.

Starting with the net income of $133,000, adjustments are necessary for depreciation, which is a non-cash expense amounting to $70,000. Changes in working capital accounts—such as accounts receivable, inventories, prepaid expenses, accounts payable, wages payable, and deferred revenue—must be considered to determine the cash flows from operating activities. In 2018, accounts receivable increased by $170,000 (from $140,000 to $310,000), indicating a cash outflow, while inventories rose by $48,000, and prepaid expenses increased by $8,000, representing cash uses. Conversely, accounts payable increased by $102,000, and wages payable increased by $49,000, which reflect cash inflows.

Investing activities mainly involve the purchase of long-term assets. In 2018, the company acquired property and buildings valued at $455,000, slightly higher than the previous year, indicating that the company invested in long-term fixed assets, paid for entirely in cash. The purchase of additional property and buildings leads to a cash outflow from investing activities, which aligns with the increased capital expenditure. Furthermore, the sale or disposal of assets at book value would impact this section if applicable.

Regarding financing activities, the company paid a portion of its existing bank loan—reducing the loan from $300,000 to $248,000—and took out new loans, as evidenced by the increased bank loan from $248,000 to $333,000. However, in the initial year-end 2018, the total increase in the bank loan was $33,000, which suggests new financing. All cash payments related to loan repayments are considered financing outflows unless new borrowing occurs.

By integrating these aspects, the cash flow statement can be constructed: net income adjusted for depreciation and changes in working capital primarily reflects operating activities. The purchase of long-term assets represents investing activities, and loan repayments or borrowings affect financing activities. The net increase in cash amounts to $19,000, resulting in an ending cash balance of $129,000, consistent with the figures provided.

Thus, the indirect method reveals how operational profitability, capital expenditures, and long-term financing influence cash flows, giving a comprehensive view of the company's cash position at year-end 2018. Accurately capturing these elements informs management decisions about future investments, debt management, and operational efficiency.

References

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  • Ross, S. A., Westerfield, R. W., & Jaffe, J. (2013). Corporate Finance. McGraw-Hill Education.
  • Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2018). Financial Accounting. Wiley.
  • Higgins, R. C. (2012). Analysis for Financial Management. McGraw-Hill Education.
  • Epstein, L., & Jermakowicz, E. (2010). Implementing IFRS: The Guide to International Financial Reporting Standards. Wiley.
  • Accounting Standards Codification (ASC) 230: Statement of Cash Flows. FASB.
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  • Schroeder, R. G., Clark, M. W., & Cathey, J. M. (2019). Financial Accounting Theory and Analysis. Wiley.

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