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Chapter 23: Q10BE (page 1374)

Hendrickson Corporation reported net income of \(50,000 in 2017. Depreciation expense was \)17,000. The following working capital accounts changed.

Accounts receivable $11,000 increase

Available-for-sale debt securities 16,000 increase

Inventory 7,400 increase

Nontrade note payable 15,000 decrease

Accounts payable 12,300 increase

Compute net cash provided by operating activities.

Short Answer

Expert verified

The net cash provided by operating activities is computed as $60,900

Step by step solution

01

Definition of net Income

The net income of the business is defined as the income earned by the company after deducting all the expenses from the revenues generated during the period.

02

Computation of net cash provided by operating activities

Cash flows from Operating Activities

Net Income

$50,000

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation Expense

17,000

Increase in accounts payable

12,300

Increase in accounts receivables

-11,000

Increase in Inventory

-7,400

10,900

Net cash provided by operating activities

$60,900

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Most popular questions from this chapter

Data for Brecker Inc. are presented in E23-13. Instructions Prepare a statement of cash flows using the indirect method.

Question: The board of directors of Tirico Corp. declared cash dividends of \(260,000 during the current year. If dividends payable was \)85,000 at the beginning of the year and $90,000 at the end of the year, how much cash was paid in dividends during the year?

Question:The comparative balance sheets for Hinckley Corporation show the following information.


December 31

2017

2016

Cash

\(33,500

\)13,000

Accounts receivable

12,250

10,000

Inventory

12,000

9,000

Available-for-sale debt investment

0

3,000

Building

0

29,750

Equipment

45,000

20,000

Patents

5,000

6,250

\(107,750

\)91,000

Allowance for doubtful accounts

\(3,000

\)4,500

Accumulated depreciation 鈥� equipment

2,000

4,500

Accumulated depreciation 鈥� building

0

6,000

Accounts payable

5,000

3,000

Dividend payable

0

5,000

Notes payable, short-term (non-trade)

3,000

4,000

Long-term note payable

31,000

25,000

Common stock

43,000

33,000

Retained earnings

20,750

6,000

\(107,750

\)91,000

Additional data related to 2017 are as follows.

1. Equipment that had cost \(11,000 and was 40% depreciated at time of disposal was sold for \)2,500.

2. \(10,000 of the long-term note payable was paid by issuing common stock.

3. Cash dividends paid were \)5,000.

4. On January 1, 2017, the building was completely destroyed by a flood. Insurance proceeds on the building were \(30,000 (net of \)2,000 taxes).

5. Investments (available-for-sale) were sold at \(1,700 above their cost. The company has made similar sales and investments in the past.

6. Cash was paid for the acquisition of equipment.

7. A long-term note for \)16,000 was issued for the acquisition of equipment.

8. Interest of \(2,000 and income taxes of \)6,500 were paid in cash.

Instructions

Prepare a statement of cash flows using the indirect method. Flood damage is unusual and infrequent in that part of the country

Accounting, Analysis, and Principles The income statement for the year ended December 31, 2017, for Laskowski Manufacturing Company contains the following condensed information.

LASKOWSKI CO.

INCOME STATEMENT


Revenues

\(6,583,000

Operating expenses (excluding depreciation) \)4,920,000

Depreciation expense 880,000

5,800,000

Income before income tax

783,000

Income tax expense

353,000

Net income

\( 430,000

Included in operating expenses is a \)24,000 loss resulting from the sale of machinery for \(270,000 cash. The company purchased machinery at the cost of \)750,000.

Laskowski reports the following balances on its comparative balance sheets on December 31.


LASKOWSKI CO.

COMPARATIVE BALANCE SHEETS (PARTIAL)

2017

2016

Cash

\(672,000

\)130,000

Accounts receivable

775,000

610,000

Inventory

834,000

867,000

Accounts payable

521,000

501,000

Income tax expense of \(353,000 represents the amount paid in 2017. Dividends declared and paid in 2017 totalled \)200,000.

Accounting

Prepare the statement of cash flows using the indirect method.

Analysis

Laskowski has an aggressive growth plan, which will require significant investments in plant and equipment over the next several years. Preliminary plans call for an investment of over $500,000 in the next year. Compute Laskowski鈥檚 free cash flow (from Chapter 5) and use it to evaluate the investment plans with the use of only internally generated funds.

Principles

How does the statement of cash flows contribute to achieving the objective of financial reporting?

Founded in the early 1980s, the Vermont Teddy Bear Co. designs and manufactures American-made teddy bears and markets them primarily as gifts called Bear-Grams or Teddy Bear-Grams. Bear-Grams are personalized teddy bears delivered directly to the recipient for special occasions such as birthdays and anniversaries. The Shelburne, Vermont, company鈥檚 primary markets are New York, Boston, and Chicago. Sales have jumped dramatically in recent years. Such dramatic growth has significant implications for cash flows. Provided below are the cash flow statements for two recent years for the company.

Current Year

Prior Year

Cash flows from operating activities:

Net income

\( 17,523

\) 838,955

Adjustments to reconcile net income to net cash provided by operating activities

Deferred income taxes

(69,524)

(146,590)

Depreciation and amortization

316,416

181,348

Changes in assets and liabilities:

Accounts receivable, trade

(38,267)

(25,947)

Inventories

(1,599,014)

(1,289,293)

Prepaid and other current assets

(444,794)

(113,205)

Deposits and other assets

(24,240)

(83,044)

Accounts payable

2,017,059

(284,567)

Accrued expenses

61,321

170,755

Accrued interest payable, debentures

-

(58,219)

Other

-

(8,960)

Income taxes payable

-

117,810

Net cash provided by (used for) operating activities

236,480

(700,957)

Net cash used for investing activities

(2,102,892)

(4,422,953)

Net cash (used for) provided by financing activities

(315,353)

9,685,435

Net change in cash and cash equivalents

(2,181,765)

4,561,525

Other information:

Current liabilities

\( 4,055,465

\) 1,995,600

Total liabilities

4,620,085

2,184,386

Net sales

20,560,566

17,025,856

Instructions

  1. Note that net income in the current year was only \(17,523 compared to prior-year income of \)838,955, but net cash flow from operating activities was \(236,480 in the current year and a negative \)700,957 in the prior year. Explain the causes of this apparent paradox.
  2. Evaluate Vermont Teddy Bear鈥檚 liquidity, solvency, and profitability for the current year using cash flow-based ratios.
See all solutions

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