E21-25

Portions of the financial statements for Clear Transmissions Company are provided below.
 
CLEAR TRANSMISSIONS COMPANY
Income Statement
For the Year Ended December 31, 2018 ($ in 000s) CLEAR TRANSMISSIONS COMPANY
Sales        $1,320  Selected Accounts from Comparative Balance Sheets
Cost of goods sold          500  December 31, 2018 and 2017 ($ in 000s)
Gross margin          820    Year  
Salaries expense $220           2018 2017 Change
Depreciation expense  180         10 10
Cash $   $   $ 2 
Patent amortization expense   10         2 0
Interest expense   40         22 23
Accounts receivable          (12)
Loss on sale of cash equivalents   6      456  0 2
Income before taxes          364  44 45
Inventory          (10)
Income tax expense          182  0 0
14 13
Net Income        $ 182  Accounts payable           6 
0 4
Salaries payable   80     86     (6)
  Interest payable   25     20     5 
Income taxes payable   15     10     5 
Create the Cash Flows for Operating Activities section
of the SCF

DIRECT METHOD
Cash Flows from Operating Activities:
Cash received from customers $1,332 a
Cash decrease from sale of cash equivalents (6)
Cash paid to suppliers (484)
Cash paid to employees (226)
Cash paid for interest (35)
Cash paid for income taxes (177)
Net cash flows from operating activities $ 404

INDIRECT METHOD
Cash Flows from Operating Activities:
Net income $182
Adjustments for noncash effects:
Depreciation expense 180
Patent amortization expense 10
Changes in operating assets and liabilities:
Decrease in accounts receivable 12
Decrease in inventory 10
Increase in accounts payable 6
Decrease in salaries payable (6)
Increase in interest payable 5
Increase in income tax payable 5__
Net cash flows from operating activities $404
E21-27
Comparative balance sheets for 2018 and 2017, a statement of income for 2018, and additional information from the
accounting records of Red, Inc., are provided below.
 
RED, INC.
Comparative Balance Sheets
RED, INC.
December 31, 2018 and 2017 ($ in millions)
Statement of Income
  2018   2017
For Year Ended December 31, 2018
Assets            
Cash $ 24    $ 110  ($ in millions)
Accounts receivable   178      132 
Prepaid insurance   7      3  Revenues          
Inventory   285      175  2,00
Sales revenue      $  
Buildings and equipment   400      350  0
Less: Accumulated depreciation   (119)     (240) Expenses          
  $ 775    $ 530  Cost of goods sold $1,400      
Liabilities            
Depreciation expense   50      
Accounts payable $ 87    $ 100 
Accrued expenses payable   6      11  1,89
Operating expenses   447     
Notes payable   50      0  7
Bonds payable   160      0  Net income      $ 103 
Shareholders’ Equity            
Common stock   400      400 
Retained earnings   72      19 
  $ 775    $ 530 

 
Additional information from the accounting records:
1. During 2018, $230 million of equipment was purchased to replace $180 million of equipment (95%
depreciated) sold at book value.
2. In order to maintain the usual policy of paying cash dividends of $50 million, it was necessary for Red to
borrow $50 million from its bank.

Prepare the statement of cash flows of Red, Inc., using the direct and indirect methods operating activities.

DIRECT METHOD
Cash flows from operating activities:
Cash inflows:
From customers $1,954
Cash outflows:
To suppliers of goods (1,523)
For operating expenses (456)
Net cash flows from operating activities $(25)
Cash flows from investing activities:
Purchase of equipment (230)
Sale of equipment 9
Net cash flows from investing activities (221)
Cash flows from financing activities:
Issuance of note payable 50
Issuance of bonds payable 160
Payment of cash dividends (50)
Net cash flows from financing activities 160
Net decrease in cash (86)
Cash balance, January 1 110
 Cash balance, December 31 $ 24
INDIRECT METHOD
Cash Flows from Operating Activities:
Net income $103
Adjustments for noncash effects:
Depreciation expense 50
Changes in operating assets and liabilities:
Increase in accounts receivable (46)
Increase in PPI (4)
Increase in Inventory (110)
Decrease in Accounts Payable (13)
Decrease in Exp Payable (5)

Net cash flows from operating activities $(25)