# Exercise-13 (Preparation of statement of cash flows – Indirect method)

The income statement and comparative balance sheet of Edison Corporation is given below:

During the year 2017, a dividend of \$130 was declared and paid by management of Edison Corporation. Some plant assets were purchased during 2017 and the payment was settled by issuing common stock amounting to \$35.

Required: Using the data given above, prepare statement of cash flows of Edison Corporation using indirect method.

### Solution

Depreciation expenses for the year 2017:
Accumulated depreciation on December 31, 2017 – Accumulated depreciation on December 31, 2016
= \$600 – \$585
= \$15

Issuance of capital stock for cash:
(Capital stock on Dec. 31, 2017 – Capital stock on Dec. 31, 2016) – Capital stock issued in exchange of plant assets
= (\$950 – \$850) – \$35
= \$65

Cash received from sale of investment:
Cost of investment sold + Gain on sale of investment
= (\$710 – \$650) + \$40
= \$60 + \$40
= \$100

Cash paid for purchase of plant assets:
(Gross plant assets on Dec. 31, 2017 – Gross plant assets on Dec. 31, 2016) – Plant assets acquired in exchange of common stock
= (\$950 – \$850) – \$35
= \$65

More from Statement of cash flows (exercises):
A D V E R T I S E M E N T
33 Comments on Exercise-13 (Preparation of statement of cash flows – Indirect method)
1. varsha

how did you calculate the issuance of capital amount?

1. Accounting For Management

Amount of shares issued during the period: \$950 – \$850 = \$100
Amount of shares issued in exchange of plant assets: \$35
Amount of shares issued for cash: \$100 – \$35 = \$65

How can get depreciation expense 15

1. Accounting For Management

Depreciation expenses during the year = Accumulated depreciation on December 31, 2017 – Accumulated depreciation on December 31, 2016
= \$600 – \$585
= \$15

1. arifaliyev

Dep expense = AD in 2017 (600) – AD in 2016 (585) – AD decrease coming from the disposal of plant asset (0)

2. how to reverse the non cash expenses on statement of cash flow when we’re using indirect method

2. abdelrahman nassar

i think there’s shares issued by 35 \$ (exchanged by plant asset) surplus 100 \$ shares issued during the period = 135 \$

1. Accounting For Management

The amount of total shares issued is \$100. Out of this issue, shares amounting to \$35 were exchanged for plant. The amount of shares issued for cash is therefore \$65 (= \$100-\$35).

3. Ashraf Aziz

What i can understand from your words that the company issued shares amounting to \$200.

Is that true ?

Thank you.

2. varsha

last question
how did you calculated amount proceeds from sale of investments and purchase of plant assets?
explain?
formula of cash paid for is
cash paid for plant= ending gross plant + gross cost of plant sold – beg gross plant

1. Accounting For Management

We have included the explanation below the statement of cash flows.

If something is still unclear, please don’t hesitate to ask. We welcome every comment and feedback. 🙂

3. varsha

thank you sir,
then i will ask question again, why i am not getting my answer through my formula which is written cfa level 1 curriculum.
cash paid for plant= ending gross plant + gross cost of plant sold – beg gross plant
ending gross plant= 950
beg gross plant= 850
gross cost of plant sold= beg plant + purchase plant – ending plant = 850 + 35- 950= -65 then
cash paid for plant= ending gross plant + gross cost of plant sold – beg gross plant
cash paid for plant = 950 + (-65) – 850= 35

1. Accounting For Management

Your formula computes the amount of plant assets purchased during the period. It does not compute the cash paid for plant assets. It will give you the correct answer only in situations where all the assets are purchased for cash. In situations like this exercise, you need to adjust it for assets acquired for non-cash items like equities, liabilities or non-cash assets.

Your formula has been modified below:

Cash paid for plant = End gross plant + Gross cost of plant sold – Beg gross plant – Assets acquired for non-cash items
= \$950 + \$0 – \$850 – \$35
= \$65

End gross plant = \$950
Gross cost of plant sold = \$0
Beg gross plant = \$850
Plant acquired for non-cash items (for capital stock in this exercise) = \$35

4. Yvette Tchonang

Well done. Thank you
It helped refresh my memory

5. How did you calculate the payment of cash dividends ?

1. George Efthymiou

Ending Retained Earnings=Beginning Rretained Earnings+Profit after tax-Dividents
=>Dividents=Beginning Rretained Earnings+Profit after tax-Ending Retained Earnings

2. it is given in the description

6. Candice

for the cash flow for operating activities why do I get 415 instead of 430.

accounts receivable : 3.225
cash payments :
supplier : (2.050)
income taxes. : (270)

1. So do I. I think it’s the Accumulated Depreciation that shouldn’t be treated as Depreciation Expense.

7. Why is there a \$25 credit for Gain on Sale of Investment? I understand where the 40 comes from, but I really can’t figure out the 25??

1. Accounting For Management

@SOFIYA!
\$25 has nothing to do with the gain on sale of investment. It is the reduction in accrued liabilities during the period.
= (\$125 on December 31, 2016) – (\$100 on December 31, 2017)
= \$25

Hope that helps 🙂

8. please why is it that gain of sales of investment has been subtracted from the operating activities and the same time has been added in the investing activities

1. Accounting For Management

Simply because the gain on sale of investment is not related to operating activities.

9. How do you treat depreciation in the statement of profit or loss and accumulated depreciation in the statement of financial position ?

10. Foziljon Khodjaev

What about taxation and dividents paid?

11. Alessandro

Hello! How did you get the 130 payment of cash dividends? Thank you

1. This information is given in the question. See below income statement.

12. Noah Terefe

how did you calculate Gain on sales investment? where did the \$ 40 came from

1. it’s in the income statement but i don’t know why it is deducted in operating activities

13. Niranjan

Why income tax expenses is not included in cash flow statement?

14. how do you calculate the gain of the sale investement

15. The difference of accumulated depreciation for the two periods (600-585)

16. good exercise example