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 $80,800 $96,800
Accounts receivable 65,400 70,400
Inventory 87,800 80,000
Total current assets 234,000 247,200
Property, plant, and equipment 234,000 224,000
Less accumulated depreciation 78,000 56,000
Net property, plant, and equipment 156,000 168,000
Total assets $390,000 $415,200
Accounts payable $51,200 $91,000
Income taxes payable 39,800 51,200
Bonds payable 96,000 80,000
Common stock 112,000 96,000
Retained earnings 91,000 97,000
Total liabilities and stockholders’
equity $390,000 $415,200
During the year, Ravenna paid a $9,600 cash dividend and it sold a piece of equipment for $4,800 that had originally cost $10,800 and had accumulated depreciation of $7,200. The company did not retire any bonds or repurchase any of its own common stock during the year.
1. What is the combined amount and direction (+ or) of the inventory and accounts payable adjustments to net income in the operating activities section of the statement of cash flows?2. If the company debited income tax expense and credited income taxes payable $1,180 during the year, what is the total amount of the debits recorded in the Income Taxes Payable account?3. What is the amount and direction (+ or) of the income taxes payable adjustment to net income in the operating activities section of the statement of cash flows?4. Would the operating activities section of the company’s statement of cash flows contain an adjustment for a gain or a loss? What would be the amount and direction (+ or ) of the adjustment?

Answer 1

Answer:

1. Adjustment = - $46,800

2. Debits = $12,580

3. Adjustment  = - $12,580

4. Yes : Adjustment = - $1,200

Explanation:

Required 1.

Prepare an Analysis of Cash Movement

Increase In Inventory                       ($7,000)

Decrease in Accounts payable     ($39,800)

Combined Effect                            ($46,800)

Required 2

Open a Income tax Payable Account

Debit :

Closing Balance                               $39,800

Cash (Balancing figure)                    $12,580

Totals                                                $52,380

Credit:

Opening Balance                             $51,200

Profit and Loss                                     $1,180

Totals                                               $52,380

Conclusion : Debit relate to the payment of Income taxes

Required 4.

Open an Equipment Disposal Account

Debit :

Cost                                                $10,800

Profit and Loss  (gain on sale)        $1,200

Totals                                             $12,000

Credit:

Accumulated Depreciation            $7,200

Cash                                                $4,800

Totals                                             $12,000

Conclusion : Gain on Sale of Equipment is an Non - Cash item that needs an Adjustment in the Cash flow statement.