Question

Ravenna Company is a merchandiser that uses the indirect method to prepare the operating activities section of its statement of cash flows. Its balance sheet for this year is as follows:

	Ending Balance			Beginning Balance
Cash and cash equivalents	$	89,000		$	106,750
Accounts receivable		71,500			77,000
Inventory		96,000			87,500
Total current assets		256,500			271,250
Property, plant, and equipment		255,000			245,000
Less accumulated depreciation		85,000			61,250
Net property, plant, and equipment		170,000			183,750
Total assets	$	426,500		$	455,000
Accounts payable	$	56,000		$	99,500
Income taxes payable		43,500			57,000
Bonds payable		105,000			87,500
Common stock		122,500			105,000
Retained earnings		99,500			106,000
Total liabilities and stockholders’ equity	$	426,500		$	455,000

During the year, Ravenna paid a $10,500 cash dividend and it sold a piece of equipment for $5,250 that had originally cost $12,000 and had accumulated depreciation of $8,000. The company did not retire any bonds or repurchase any of its own common stock during the year.

2. What net income would the company include on its statement of cash flows?

4-a. If the company debited Accounts Receivable and credited Sales for $1,050,000 during the year, what is the total amount of credits recorded in Accounts Receivable during the year?

4-b. What does the amount of these credits represent?

5-a. What is the amount and direction (+ or −) of the accounts receivable adjustment to net income in the operating activities section of the statement of cash flows?

5-b. What does this adjustment represent?

Answer 1

Solution 2:

Net Income to be included in statement of cash flows = Ending retained earnings - Beginning retained earnings + Dividend paid

= $99,500 - $106,000 + $10,500 = $4,000

Solution 4a:

Total amount of credits recorded in Accounts Receivable during the year = Beginning accounts receivables + Sales - Ending accounts receivables

= $77,000 + $1,050,000 - $71,500 = $1,055,500

Solution 4b:

The credit amount represents the cash collected from customer.

Solution 5a:

Amount and direction (+ or −) of the accounts receivable adjustment to net income in the operating activities section of the statement of cash flows:

Amount = $77,000 - $71,500 = $5,500

Direction = + (Postive)

Solution 5b:

This adjustment represents decrease in accounts receivables resulting in increase in cash flows.