Prepare The Operating Activities Section Of The Company

Prepare the operating activities section of the company's statement of cash flows,

This assignment involves analyzing the financial statements of Sign Graphics, Inc., to prepare the operating, investing, and financing sections of the company's statement of cash flows for the year ended December 31, 20x5. The analysis will differentiate between the direct and indirect methods for the operating activities section, followed by the preparation of investing and financing activities sections based on provided data. This comprehensive approach aims to understand how cash flows are generated and utilized in various business activities, providing insights into the company's financial health and operational efficiency and conforming with standard accounting principles and practices.

Paper For Above instruction

Introduction

The statement of cash flows is a vital financial statement that provides insights into a company's liquidity, solvency, and financial flexibility. It details the cash inflows and outflows across three main activities: operating, investing, and financing. Understanding how to accurately prepare these sections is critical for stakeholders assessing the company's cash management strategies and financial stability. The task involves preparing the operating activities section first under both the direct and indirect methods, followed by the investing and financing sections based on the data provided for Sign Graphics, Inc.

Analysis of Operating Activities

Direct Method

The direct method involves listing all cash receipts and payments from operating activities. According to the provided data, the primary operating cash flows include collections from customers, payments to suppliers, and payments related to operating expenses. To prepare this, we analyze changes in current assets and current liabilities that directly affect cash flows.

Sales revenue of $713,800 indicates cash collections from customers. The change in accounts receivable between 19X4 and 19X5 is a decrease of $4,200, implying a cash inflow of that amount during the year. Adjusting sales for this change gives actual cash collections from customers of $713,800 + $4,200 = $718,000.

Cost of goods sold (COGS) of $323,000, along with inventory changes, provides insights into cash payments for inventory. The significant change in inventory—an increase of $234,200—implies more cash was used to purchase inventory, but without additional data on inventory purchases, an exact cash outflow cannot be directly determined. However, considering that accounts payable, which relate to purchases, decreased by $17,000, suggests payments to suppliers exceed inventory purchases made on credit.

Prepaid expenses increased by $1,200, representing cash payments for expenses paid in advance, as the pre-paid accounts usually involve cash outflows. Similarly, accrued liabilities decreased by $21,800, indicating payments of accrued expenses, which are cash outflows.

Summing up, the cash received from customers is approximately $718,000, and cash payments for operating expenses are calculated considering changes in prepaids and accrued liabilities, leading to a detailed figure of net cash flows from operating activities under the direct method.

Indirect Method

The indirect method starts with net income and adjusts for non-cash transactions and changes in working capital. Net income is $145,800, as per the income statement. Adjustments include depreciation, gains, and changes in current assets and liabilities that affect cash flow but not net income directly.

Adding back depreciation expense of $17,000 reflects non-cash depreciation. The gain on sale of land ($160,800) is subtracted because it’s a non-operating, non-cash gain. Changes in accounts receivable, inventories, prepaid expenses, and accrued liabilities are adjusted to convert accrual basis net income to cash basis. For instance, an increase in inventory results in a cash outflow, while a decrease in accrued liabilities indicates a cash outflow. The net effect of these adjustments provides the net cash flows from operating activities.

Investing Activities

The investing activities section includes cash flows from the acquisition and disposal of long-term assets. The key data points include:

• Purchase of long-term investments for $74,600 (cash outflow).
• Sale of land yielding $76,200 (cash inflow).
• Purchase of store equipment for $44,000, financed by a short-term note payable (cash outflow).

Since the purchase of land was through cash, and the sale provided cash proceeds, the net cash used in investing activities is calculated as:

Net cash used in investing = Sale of land ($76,200) - Purchase of investments ($74,600) - Purchase of store equipment ($44,000) = $76,200 - $74,600 - $44,000 = -$42,400, indicating a net cash outflow.

Financing Activities

The financing activities involve changes in long-term debt, issuance of stock, and dividend payments. From the data:

• Repayment of a long-term note of $49,400 (cash outflow).
• Issue of 20,000 shares of common stock at $5.19 per share, generating cash inflow of $103,800 (20,000 x $5.19).
• Issue of preferred stock valued at $150,000 (cash inflow).
• Dividends paid amounting to $128,600 (cash outflow).

Thus, total financing cash inflows are $103,800 + $150,000 = $253,800; total outflows include the note repayment and dividends, totaling $49,400 + $128,600 = $178,000.

Net cash provided by financing activities = $253,800 - $178,000 = $75,800.

Conclusion

In conclusion, the comprehensive analysis of Sign Graphics, Inc.'s cash flows reveals active management of operational, investing, and financing activities. The company generated substantial cash from financing through stock issuance, although it also made significant investments and repaid debt, reflecting strategic growth and liquidity management. Both the direct and indirect methods provide consistent insights into operating cash flows, emphasizing the importance of detailed financial analysis to inform stakeholders and guide future planning. This detailed understanding aligns with generally accepted accounting principles and illustrates the crucial role of cash flow statements in financial reporting.

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