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Question:(SCF—Indirect Method) The following are Sullivan Corp.’s comparative balance sheet accounts at December 31, 2017 and 2016, with a column showing the increase (decrease) from 2016 to 2017.

Comparative Balance Sheet
	2017	2016	Increase (Decrease)
Cash	\(815,000	\)700,000	\(115,000
Accounts receivable	1,128,000	1,168,000	(40,000)
Inventory	1,850,000	1,715,000	135,000
Property, plant and equipment	3,307,000	2,967,000	340,000
Accumulated depreciation	(1,165,000)	(1,040,000)	(125,000)
Investment in Myers Co	310,000	275,000	35,000
Loan receivable	250,000	-	250,000
Total assets	\)6,495,000	\(5,785,000	\)710,000
Account payable	\(1,015,000	\)955,000	\(60,000
Income taxes payable	30,000	50,000	(20,000)
Dividend payable	800,000	100,000	(20,000)
Lease liability	400,000	-	400,000
Common stock, \) 1 par value	500,000	500,000	0
Paid-in-capital in excess of par – common stock	1,500,000	1,500,000	0
Retained earnings	2,970,000	2,680,000	290,000
Total liabilities and stockholders equity	\(6,495,000	\)5,785,000	\(710,000

Additional information:

1. On December 31, 2016, Sullivan acquired 25% of Myers Co.’s common stock for \)275,000. On that date, the carrying value of Myers’s assets and liabilities, which approximated their fair values, was \(1,100,000. Myers reported income of \)140,000 for the year ended December 31, 2017. No dividend was paid on Myers’s common stock during the year.

2. During 2017, Sullivan loaned \(300,000 to TLC Co., an unrelated company. TLC made the first semi-annual principal repayment of \)50,000, plus interest at 10%, on December 31, 2017.

3. On January 2, 2017, Sullivan sold equipment costing \(60,000, with a carrying amount of \)38,000, for \(40,000 cash.

4. On December 31, 2017, Sullivan entered into a capital lease for an office building. The present value of the annual rental payments is \)400,000, which equals the fair value of the building. Sullivan made the first rental payment of \(60,000 when due on January 2, 2018.

5. Net income for 2017 was \)370,000.

6. Sullivan declared and paid the following cash dividends for 2017 and 2016.

	2017	2016
Declared	December 15, 2017	December 15, 2016
Paid	February 28, 2018	February 28, 2018
Amount	\(80,000	\)100,000

Instructions

Prepare a statement of cash flows for Sullivan Corp. for the year ended December 31, 2017, using the indirect method.

Step by step solution

01

Definition of Cash Flow Statement

A cash flow statement is a statement prepared by the companies that show the flow of cash that is inflow or outflow in the business.

02

Statement of cash flow using the indirect method

Step 2: Statement of cash flow using the indirect method

Particular	Amount $	Amount $
Net income		$370,000
Add/Less: adjustment to net income
Depreciation expenses	125,000
Depreciation expenses of equipment sold	22,000
Gain on sale of equipment	(2,000)
Equity earnings$\left(\$140,000×25\%\right)$	(35,000)	110,000
Add/Less: change in the current assets and liabilities
Decrease in accounts receivable	40,000
Increase in inventory	(135,000)
Increase in accounts payable	60,000
Decrease in income tax payable	(20,000)
Decrease in dividend payable	(20,000)	(75,000)
Cash flow from operating activities		$405,000
Cash flow from investing activities
Proceed from the sale of equipment	40,000
Loan to TLC Co	(300,000)
Semi-annual payment received	50,000
Cash flow from investing activities		(210,000)
Cash flow from financing activities
Dividend payment	$80,000
Cash flow used in financing activities		($80,000)
Net changes in cash		$115,000
Add: opening cash balance		700,000
Ending cash balance		$815,000
Noncash financing and investing activities:
Issuance of the capital lease for an office building		$400,000

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