Question

# Ravenna Company is a merchandiser that uses the indirect method to prepare the operating activities section...

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?

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.

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