The following information is for Redwood Inc. for the year ended December 31, 2016. Redwood had a cash and cash equivalents balance of $5,600 on January 1, 2016.

Cash Received from:

Customers $ 1,940

Interest on investments 220

Sale of land 120

Sale of common stock 640

Issuance of debt securities 2,040

Cash Paid for:

Interest on debt 320

Income tax 84

Debt principal reduction 1,540

Purchase of equipment 4,500

Purchase of inventory 1,000

Dividends on common stock 220

Operating expenses 520

Required:

Prepare a statement of cash flows for the year using the direct method for operating activities. (Amounts to be deducted should be indicated with a minus sign.)

Answer and Explanation:

The preparation of the cash flow statement using the direct method is presented below:

Redwood Inc.

Cash flow statement

For the year ended December 31, 2016

Cash flow from operating activities

Cash Received from Customers $1,940

Interest on investments $220

Less: Interest on debt - $320

Less: Income tax - $84

Less: Purchase of inventory - $1,000

Less: Operating expenses - $520

Net cash provided by operating activities $236

Cash flow from investing activities

Sale of land $120

Less: Purchase of equipment - $4,500

Net cash used by investing activities - $4,380

Cash flow from financing activities

Sale of common stock $640

Issuance of debt securities $2,040

Less: Debt principal reduction - $1,540

Less: Dividends on common stock - $220

Net cash provided by financing activities $920

Decrease in cash - $3,224

Add: Beginning cash balance $5,600

Ending cash balance $2,376

The items which shows in a positive sign indicates the cash inflow and the items which shows in a negative sign indicates the cash outflow and the same is to be considered