Problem 1 Statement of Cash Flows The following Statement of

Problem #1 Statement of Cash Flows

The following Statement of Cash Flows was prepared for the Baines Corporation.

Walker Corporation

Statement of Sources and Uses of Cash

Year Ended December 31, 2017

Sources of cash

                      Net income $111,000

                        Depreciation and depletion                                                                               70,000

                        Increase in long-term debt 179,000

                        Changes in current receivables and inventories,

                        less current liabilities 14,000

$374,000

Uses of cash

                      Cash dividends $ 60,000

                        Expenditure for property, plant, and equipment 214,000

                        Investments and other uses 20,000

                        Change in cash 80,000

The following additional information relating to Walker Corporation is available for the year ended December 31, 2017.

1. Wage and salary expense attributable to stock option plans was $25,000 for the year.

2. Expenditures for property, plant, and equipment $250,000

   Proceeds from retirements of property, plant, and equipment                       36,000

Net expenditures $214,000

3. A stock dividend of 10,000 shares of Walker Corporation common stock was distributed to common stockholders on April 1, 2017, when the per share market price was $7 and par value was $1.

4. On July 1, 2017, when its market price was $6 per share, 16,000 shares of Walker Corporation common stock were issued in exchange for 4,000 shares of preferred stock.

5. Depreciation expense                                                                         $ 65,000

                        Depletion expense 5,000

$ 70,000

6. Increase in long-term debt                                                                  $620,000

Retirement of debt 441,000

Net increase $179,000

Required:

A. In general, what are the objectives of a statement of the type shown above for Walker Corporation? Explain

B. Identify the weaknesses in the form and format of Walker Corporation\'s statement of cash flows without reference to the additional information. (Assume adoption of the indirect method.)

C. For each of the six items of additional information for the statement of cash flows, indicate the preferable treatment and explain why the suggested treatment is preferable.

Solution

Answer A)

In General the statement of cash flow indicates the flow of cash in an organization. The Above statement also shows the sources of cash and uses of cash with closing balance of cash. Cash flow also helps in prediction about the future cash flows by analyzing current year’s cash flows and measures the company’s ability to invest in future or to take any financing decisions. The Cash flow statement shows the liquidity of a company by indicating all the uses and sources of cash. The liquidity position is good if sources of cash are more than uses of cash and Vice Versa.

Answer B)

The statement given above is also showing the flow of cash but the presentation is improper and does not specifically indicate the nature of cash inflow or outflow. A proper cash flow statement shows the amount of cash flow generated by operating activities, Investing Activities and Financing Activities. A high cash balance does not necessarily means a better financial position which can only be analyzed with a proper Cash Flow Statement. An Indirect method for preparing cash flow also shows the reconciliation of Income with operating cash generated.

The above shown Cash flow statement does not show the transaction in detail such as Changes in current receivables and inventories, less current liabilities. The amount of changes in all the current assets and current liabilities are indicated individually in the cash flow statement.

Uses of cash flow are also required to be given in details. Investments and other uses $ 20,000 as shown in cash flow statement does not provide the amount of investment actually purchased.

A cash flow also shows the reconciliation between opening and closing cash balance.

Answer C)

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