Question

The following is a condensed version of the comparative balance sheets for Pearl Corporation for the last two years at December 31. 2020 2019 Cash $ 292,050 $ 128,700 Accounts receivable 297,000 305,250 Investments 85,800 122,100 Equipment 491,700 396,000 Accumulated Depreciation-Equipment (174,900 ) (146,850 ) Current liabilities 221,100 249,150 Common stock 264,000 264,000 Retained earnings 506,550 292,050 Additional information: Investments were sold at a loss of $16,500; no equipment was sold; cash dividends paid were $49,500; and net income was $264,000. Prepare a statement of cash flows for 2020 for Pearl Corporation. (Show amounts that decrease cash flow with either a - sign e.g. -15,000 or in parenthesis e.g. (15,000).)

Answer 1

Answer:

Balance Sheets    

2020          2019                Deviation  

$292,050 $128,700  $163,350        Cash

$163,350   Cash Flow Ind Method  

$264,000   Net Income  

$28,050   Depreciation  

-$49,500   Dividends  

$36,300   Investments  

$8,250           Accounts Receivable  

-$28,050   Current Liabilities  

-$95,700   Property and Equipment  

Explanation:

To prepare the statement of cashflow it's necessary to calculate the difference between the balance on each year.

First we need the value of the Net Income and Depreciation of the year as initial value of the cash flow ($264,000+$28,050),  

then we deduct the amount of dividends paid during the year (-$49,500).  

Then we begin to calculate the Assets section, everytime that the Assets are higher than the past year we have to put money  

from the cash flow to compensate the assets increase and vice versa, with exception of the Cash Accounts that we are calculating.

Per Example: Accounts Receivable +$8,250 and Investments +$36,300.

Property decreased Cash flow which means that we buy some assets (-$97,500 )

Then with the Liabilities we do the same but in this case an increase in the liabilities means we have more money to our cash flow,

per example, an increase in the accounts payable means that we paid less to our suppliers so we have the money in the cash accounts.  

Total Current Liabilities decrease $28,050 , we paid more liabilities than the past year, so we have to use cash.  

To complete the cash flow statement  it's necessary that the amount of the statement be equal to the deviation in the cash account between the past year and the current one