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

Question

Spooky 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, 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. Spooky loaned $24,000 to Witch Company signing a long-term note receivable.

5. Spooky declared and paid dividends of $32,000. Net income was $420,000.

What is Spooky Company's net cash flow from investing activities?

Accepted Answer

Alright, let's see how you guys did with this in-depth practice problem. Spooky Company is preparing its Statement of Cash Flows and gathered the following information. So we're dealing with investing activities here, right? Let's see what information we've got. Since the previous year, the cash account increased by 35,000, land increased by 40,000, equipment decreased by 15,000, accumulated depreciation on equipment increased by 6,000 and bonds payable increased by 100,000. It's a lot of information already, but remember we are focused on investing activities. So it tells us depreciation expense for equipment totaled $16,000 Equipment with a purchase price of $15,000 was sold for a $2,000 gain. So we know that there's going to be a sale there. Spooky loaned $24,000 to Which Company signing a Long Term Note Receivable. And finally, Spooky declared and paid dividends of $32,000 Net income was $420,000 Okay. So the first thing I want to do is I want to get rid of this extraneous information. We don't need dividends or net income when we're dealing with investing activities. Okay? If we're just focused on investing activities, all we want is long term assets. These bonds payable over here, it also talked about bonds payable and extraneous information as well. Notice, it also told us that the cash account increased. That's important for the statement of cash flows, but that's for the statement of cash flows as a whole. We're only focused on the investing activities. There's also operating activities and financing activities. That's going to make total cash increase. So 35,000 isn't going to be our answer here. Everything else seems to be related to any sort of long term asset, Right? So let's go ahead and deal with these 1 by 1. Let's start with the land. It says that land increased by 40,000. So what I want to do is I want to make T accounts for each of these things and we'll do we'll do that first. So we've got land and we're gonna have a beginning balance and ending balance for land. And what can increase a land account would be purchasing more land, right, if we purchase land and what could decrease a land account would be selling land, Right? If we sold any land. So it told us that the land account increased by 40,000, so it went from 0 to 40,000. Right? That's the easiest way to deal with an increase if they don't give you a beginning and ending balance. Just put 0 for the beginning and 40,000 for the ending and that's an increase of 40,000. No matter what numbers you put in there, as long as there's a $40,000 difference, you're going to be okay, right? So the easiest thing is to start with 0. Now if it was a decrease, well you'd start with 40,000 and decrease to 0, right? But in this case, we have an increase of 40,000 and it doesn't give us any other information related to land, right? Everything else is equipment, accumulated depreciation on equipment, depreciation expense and you should remember land there's no depreciation on land, right? Land is the only plant asset that's not depreciated so depreciation has nothing to do with it. Equipment was purchased, Spooky signed a long term note, so nothing else has to do with land. So we know that there had to be a $40,000 purchase of land for us to get from 0 to 40,000. Okay? So that means there was a cash outflow to purchase this land. Okay? So we'll deal with the summary of everything at the end, but we're done with the land account for now. Now, let's deal with the equipment account and the associated accumulated depreciation account. So let's do that here right next to it. We'll set up equipment and accumulated depreciation. Okay? Equipment and accumulated depreciation. So what do we know about these accounts? It says that the equipment decreased by 15,000. So if we started with the beginning balance of 15,000, we know the ending balance would be 0. Okay. That's the easiest way to deal with these types of situations and the accumulated depreciation input for the equipment increased by 6,000. So we could have say we started with 0 and it got to 6,000. Okay? So that would be the beginning balance here and the ending balance. Now notice that these numbers don't have to be entirely correct. Obviously, they could have had 1,000,000 in equipment and then it decreased by 15,000. They could have had 500,000 in the accumulated depreciation and it increased by 6,000. This is just to keep our math simple. Okay? So we've already dealt with all of this information in the first the first bullet point. We got rid of the extraneous information and now we've used the other information to fill in our T accounts. Okay? So now we have to think about what can increase or decrease these accounts. Let's start with equipment. With equipment, it increases when we purchase equipment, right and it decreases when we sell equipment. How about for begin for, accumulated depreciation? Well when we take depreciation expense, that's going to increase our accumulated depreciation, so notice that it has credit balances there. And what about how can we decrease this account is when we sell some equipment that has associated accumulated depreciation. We would have to get it off of our books. So remember that these sales, whenever we make a sale of equipment, well we have to get rid of its associated accumulated depreciation as well. Cool? So what other information did they give us? Here they told us depreciation expense totaled 16,000. So depreciation expense was 16,000. So we can put that into our accumulated depreciation account right here. We know that it was a 16,000 accumulated depreciation expense, excuse me, depreciation expense that went in there. And we don't know anything else, but we can tell that at this point the accumulated depreciation does not balance, right? We started at 0, we increased it by 16,000, but it ended at 6,000. So there must have been some sort of sale of equipment that got rid of the other balance in the account, right? So there must have been some sale of equipment that had a 10,000 decrease to the account and what about on the equipment side? Equipment with a purchase price of 15,000 was sold for a $2,000 gain. So notice here we had a 15,000 decrease in the account. So if it started at 15,000 and we sold equipment worth 15,000 that would have been a decrease to the account of 15,000 and that makes our equipment account balance, right? If we didn't purchase any more equipment, well 15,000 plus no more purchases minus the 15,000 we sold, gets us to the correct ending balance of 0. So we're starting to figure out the details of that equipment purchase. Excuse me, that equipment sale. So let's go ahead and do our journal entry for that equipment sale, now that we have a little more information. Notice in bullet point 3, it did not tell us any cash amount, right? Remember, the cash is the amount that we're searching for. We need to know what the cash was in this transaction. All they told us was the historical cost of the equipment was 15,000. They told us there was a gain on the sale and we were able to figure out that the accumulated depreciation for the equipment we sold was 10,000 because that's what we balanced out our accumulated depreciation account, right? We had to figure out this 10,000 or we wouldn't be able to make this journal entry. So what does this tell us? It tells us that we received some cash on this sale. We have to get rid of the accumulated depreciation with a debit. We have to get rid of the equipment with a credit, and it told us there was a gain on the sale, which would be another credit of 2,000. So let's fill this in. We know that the accumulated depreciation was 10,000 because we solve that inside of our T account, right? So the trick here is being able to realize that the depreciation expense affects the accumulated depreciation, but the change in the account was not the same. So there had to be some decrease to the account, and we figured that out to be 10,000. We found that they tell us that the equipment was sold had a historical cost of 15,000 at a gain of 2,000. So what would the cash have to be for this to balance out? It would have to be 7,000, right? We would have had to sell it for 7,000 for us to have a $2,000 gain in this situation. So the real trick here was being able to figure out this accumulated depreciation coming from this information. They didn't tell us directly, but we were able to tell from the increase of the account and the depreciation expense. We had to back into this amount that helped us figure out the sale price of the equipment. Okay? So there's another cash flow right there. We have a cash inflow of 7,000, because we sold that equipment. So what's left is that spooky loan 24,000. So now we've used this information as well, right? We used all of this information. All that's left is bullet point 4, where we loaned out 24,000 to which company signing a long term note receivable. So long term note receivable, that's a long term asset, right? It's a note receivable and it's long term. So it's similar to an investment that we made. We sold or we loaned out this money and we're expecting to earn interest on it in the long term. Cool? So this loan of 24,000 right here, that is a cash outflow from investing activities and it tells us straight up what that amount is. 24 1,000 was loaned out, okay? So that's everything that's happened in the investing section. First, we had purchase of land for 40,000, right? Because we saw that the land account increased by 40,000 and then here, let me get back in here. We had the sale What happened there? We had the sale of sale of equipment, and that brought in cash of 7,000, right? So this purchase of land was a decrease, right? That was an outflow of cash, and then the sale of equipment was an inflow of cash of 7,000 that we saw in our journal entry up here. And then finally, we had an outflow of cash for the loan that we made. So, loan to which company? In the amount of 24,000. So we loaned out that money and that was a long term investment for us. So if we do the 40,000 plus 7,000 minus 24,000, it comes out to a 57,000 net outflow of cash. So this is from investing activities, we had a net outflow of 57,000 in cash. Alright? That's pretty tough there. You can't expect to get these on your first try. You kind of have to practice using these t accounts and figuring out the missing numbers, right? So in this case, we had a net outflow of 50 7,000 and that's about it for this one. Let's go ahead and move on to the next video.

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