Turkey Company is preparing its Statement of Cash Flows and ga...

Question

Turkey Company is preparing its Statement of Cash Flows and gathered the following information:

1. Since the previous year:the cash account increased by $35,000, land increased by $40,000, Equipment decreased by $15,000, Accumulated Depreciation – Equipment increased by $6,000, Retained Earnings increased by $340,000, and Bonds Payable increased by $100,000,

2. Depreciation expense for Equipment totaled $16,000.

3. Equipment with a purchase price of $15,000 was sold for a $2,000 gain.

4. Turkey loaned $24,000 to Potatoes Company signing a long-term note receivable.

5. Net income was $420,000.

6. Turkey issued 100,000 shares of $5 par value common stock. The additional paid-in capital from this transaction was $300,000.

What is Turkey Company's net cash flow from financing activities?

Accepted Answer

Alright, let's see how you guys did with this in-depth practice problem. Turkey company is preparing its statement of cash flows and gathered the following information. So notice we're focused on financing activities here, right? We're focused on the financing activities, so you can expect that there's going to be extraneous information. Since the previous year the cash account increased by 35,000, land increased by 40,000, equipment decreased by 15,000, accumulated depreciation 6,000, Retained earnings increased by $340,000 Bonds payable increased by $100,000 A lot of information there. But notice, the cash account increase, well that's going to be the total increase from operating, investing and financing. That's not going to help us for just the financing activities. Land is not related to our financing activities, neither is equipment, neither is accumulated depreciation. Retained earnings, yes, that's an equity account. So that might be helpful. So we'll leave that there and bonds payable that should definitely be included as well. Depreciation expense totaled 16,000. That's extraneous information, right? That's related to investing activities or operating activities if we're doing the indirect method. For financing, we don't care about depreciation expense. Equipment with a purchase price was sold for 2,000. Well, we don't care about equipment sales. That's an investing activity as well. Turkey loaned 24,000 to potatoes company signing a long term note receivable. Well, note receivable, that is again an investment, right? This is a long term asset, so this has nothing to do with us either when we talk about long term note receivable. So a lot of this was extraneous information related to investing activities, not financing activities. Let's keep going. Net income was $420,000 Now that could be important when we're dealing with our retained earnings account. Because notice that it told us about retained earnings, it told us about net income, but it didn't tell us anything about dividends. We could expect that dividends would be a part of our financing activities. So we might have to back into dividends there. And finally, Turkey issued a 100,000 shares of $5 par value common stock. Additional paid in capital from this transaction was 300,000 So here we go, that one sounds important as well, right? That sounds like a financing activity. We issued shares of stock. So let's go ahead and start with bonds payable. We'll start with our long term liability of bonds payable and notice that it doesn't mention any other thing about bonds payable. It just says that the account increased by 100,000. So for this account to increase by 100,000, we would have had to issue new bonds payable to receive some cash, right? So we would have received cash of 100,000 and we would have had bonds payable of 100,000. That would increase the account by 100,000. So this cash right here, this cash of 100,000, that is an inflow of cash from financing activities, right? For the bonds payable account to increase. So that one's easy enough. Let's move on to our equity accounts. Let's do our retained earnings. For this one, I think it'll be easier to have a T account. So let's make a T account for retained earnings and let's think about the things that can affect retained earnings. We're gonna have our beginning balance and then it increases by our net income and it decreases when we pay dividends, right? And this is probably what we're looking for here is this payment of dividends that gets us to our ending balance. So we should be feel pretty comfortable with that T account, beginning balance plus net income minus dividends gets us to our ending balance. So let's see what information they gave us. They told us the retained earnings increased by 340,000. So for it to increase by 340,000, we can use the easy numbers, right? We can start with 0 and go to 340,000. That shows an increase of 340,000 in the account. Notice they didn't give us beginning or ending balances, so we have to imply those numbers and it's easiest to do it with 0 and 340,000. You could use any two numbers as long as the difference is 340,000. Now these are the easiest ones. So it also told us net income was 420,000 here, right? So we can plug that into our T account and all that's left is to find what the dividends were, right? Because if we started at 0, the net income increased it by 420,000. Well, dividends had to decrease the account, right? So if we do 0 I'll do it underneath. If we started with 0, we added 420,000 and then we subtracted the dividends which were X. It got us to our ending balance of 340,000, right? So if we add x to both sides, subtract 340,000 from both sides, it'll get us to our amount of dividends paid and it'll be 80,000, right? Our dividends were 80,000 paid. So that's going to be right here dividends paid 80,000. And since it doesn't say anything about dividends payable account, we don't have to do a dividends payable, we can just assume that this 80,000 was paid out already, okay? They would have to give us additional information about dividends payable if we were going to find a difference between the declared dividends and the paid dividends. Okay, so in this example, 80,000 will be the dividends paid. Last but not least, we have the issuance of common stock. So what happens when we issue common stock? Well we're going to have our par value and we're going to have APIC. So remember when we issue common stock, we make a journal entry that looks like this. We're gonna have cash, we're gonna have an inflow of cash, and then we're gonna increase our common stock account by the par value, and we're gonna increase the a pick account, for any additional paid in capital above par value. So in this situation, they told us that APIC was 300,000, right? We can figure out what the par value is because they told us it was $5 par value for a 100,000 shares, so the par value is going to equal a 100,000 shares times $5 per share. Well, that's going to be 500,000. So now that we know the common stock, par value was 500,000, there was additional paid in capital of 300,000. What we know that the cash inflow from selling these stock was going to be 800,000. Notice how they had us back into it. Is pretty tricky. They're having you really feel comfortable with the journal entries that you've been making all throughout the course to back into these cash amounts. Okay? So now we've worked with all the information they've given us, we found all of the financing cash flows. Okay? So there's going to be the inflow of cash from the bonds payable, the inflow of cash from the issuance of bonds and the outflow of cash from the dividends. So let's add those all up underneath here. So we'll have issued bonds payable and that means we have increased our liability, so we increased our cash here. We received cash now. We issued common stock, and we saw that that was an 800,000 inflow. And then we paid dividends, and that was an outflow of 80,000. So if we add all of these up, a 100,000 plus 800,000 minus 80,000 that comes out to 820,000 financing activity inflow. Okay. So this was inflows from financing activities 820,000. Cool? Alright. That's it for this one. Let's move on to the next video.

Struggling with Financial Accounting?

Watch next

Financing Activities practice set