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

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25 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

      1. Adwalina

        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. 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
    but i didn’t get answer

    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. Hani

    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

  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)
    selling&admin xp : (490)
    income taxes. : (270)

    1. Aldi

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

  7. Sofiya

    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. Gabriel

    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. J

    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. Rashid

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

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