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Chapter 23: Q5Q (page 1371)
Identify and explain the major steps involved in preparing the statement of cash flows.
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Question: (SCF鈥擨ndirect Method) Condensed financial data of Pat Metheny Company for 2017 and 2016 are presented below.
PAT METHENY COMPANY COMPARATIVE BALANCE SHEET AS OF DECEMBER 31, 2017 AND 2016 | ||
2017 | 2016 | |
Cash | \(1,800 | \)1,150 |
Receivables | 1,750 | 1,300 |
Inventory | 1,600 | 1,900 |
Plant assets | 1,900 | 1,700 |
Accumulated depreciation | (1,200) | (1,170) |
Long-term-investment (Held to maturity) | 1,300 | 1,420 |
\(7,150 | \)6,300 | |
Account payable | \(1,200 | \)900 |
Accrued liabilities | 200 | 250 |
Bond payable | 1,400 | 1,550 |
Common stock | 1,900 | 1,700 |
Retained earnings | 2,450 | 1,900 |
\(7,150 | \)6,300 | |
PAT METHENY COMPANY INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2017 | |
Sales | \(6,900 |
Cost of goods sold | (4,700) |
Gross margin | 2,200 |
Selling and administrative expenses | 930 |
Income from operations | 1,270 |
Other revenue and gains | |
Gains on sale of investment | 80 |
Income before tax | 1,350 |
Income tax expenses | 540 |
Net income | 810 |
Cash dividend | 260 |
Income retained in business | \)550 |
Additional information:
During the year, $70 of common stock was issued in exchange for plant assets. No plant assets were sold in 2017.
Instructions
Prepare a statement of cash flows using the indirect method.
Question: The net income for Fallon Company for 2017 was \(320,000. During 2017, depreciation on plant assets was \)124,000, amortization of patent was \(40,000, and the company incurred a loss on sale of plant assets of \)21,000. Compute net cash flow from operating activities.
Question: You have completed the field work in connection with your audit of Alexander Corporation for the year ended December 31, 2017. The balance sheet accounts at the beginning and end of the year are shown below.
Dec 31, 2017 | Dec 31, 2016 | Increase or (decrease) | |
Cash | \(277,900 | \)298,000 | (\(20,100) |
Accounts receivable | 469,424 | 353,000 | 116,424 |
Inventory | 741,700 | 610,000 | 131,700 |
Prepaid expenses | 12,000 | 8,000 | 4,000 |
Investment in subsidiary | 110,500 | 0 | 110,500 |
Cash surrender value of life insurance | 2,304 | 1,800 | 504 |
Machinery | 207,000 | 190,000 | 17,000 |
Buildings | 535,200 | 407,900 | 127,300 |
Land | 52,500 | 52,500 | 0 |
Patents | 69,000 | 64,000 | 5,000 |
Copyrights | 40,000 | 50,000 | (10,000) |
Bond discount and issue costs | 4,502 | 0 | 4,502 |
Total | \)2,522,030 | \(2,035,200 | \)486,830 |
Income tax payable | \(90,250 | \)79,600 | \(10,650 |
Account payable | 299,280 | 280,000 | 19,280 |
Dividend payable | 70,000 | 0 | 70,000 |
Bond payable 鈥� 8% | 125,000 | 0 | 125,000 |
Bond payable 鈥� 12% | 0 | 100,000 | (100,000) |
Allowance for doubtful accounts | 35,300 | 40,000 | (4,700) |
Accumulated depreciation 鈥� building | 424,000 | 400,000 | 24,000 |
Accumulated depreciation 鈥� machinery | 173,000 | 130,000 | 43,000 |
Premium on bond payable | 0 | 2,400 | (2,400) |
Common stock 鈥� no par | 1,176,200 | 1,453,200 | (277,000) |
Paid-in-capital in excess of par 鈥� common stock | 109,000 | 0 | 109,000 |
Retained earnings 鈥� unappropriated | 20,000 | (450,000) | 470,000 |
Total | \)2,522,030 | \(2,035,200 | \)486,830 |
STATEMENT OF RETAINED EARNINGS FOR THE YEAR ENDED DECEMBER 31, 2017 | ||
January 1, 2017 | Balance (deficit) | (\(450,000) |
March 31, 2017 | Net income for first quarter of 2017 | 25,000 |
April 1, 2017 | Transfer from paid-in capital | 425,000 |
Balance | 0 | |
December 31, 2017 | Net income for last three quarters of 2017 | 90,000 |
Dividend declared鈥攑ayable January 21, 2018 | (70,000) | |
Balance | \)20,000 | |
Your working papers from the audit contain the following information:
1. On April 1, 2017, the existing deficit was written off against paid-in capital created by reducing the stated value of the nopar stock.
2. On November 1, 2017, 29,600 shares of no-par stock were sold for \(257,000. The board of directors voted to regard \)5 per share as stated capital.
3. A patent was purchased for \(15,000.
4. During the year, machinery that had a cost basis of \)16,400 and on which there was accumulated depreciation of \(5,200 was sold for \)9,000. No other plant assets were sold during the year.
5. The 12%, 20-year bonds were dated and issued on January 2, 2005. Interest was payable on June 30 and December 31. They were sold originally at 106. These bonds were redeemed at 100.9 plus accrued interest on March 31, 2017.
6. The 8%, 40-year bonds were dated January 1, 2017, and were sold on March 31 at 97 plus accrued interest. Interest is payable semiannually on June 30 and December 31. Expense of issuance was \(839.
7. Alexander Corporation acquired 70% control in Crimson Company on January 2, 2017, for \)100,000. The income statement of Crimson Company for 2017 shows a net income of \(15,000.
8. Major repairs to buildings of \)7,200 were charged to Accumulated Depreciation鈥擝uildings. 9. Interest paid in 2017 was \(10,500 and income taxes paid were \)34,000.
Instructions
From the information given, prepare a statement of cash flows using the indirect method. A worksheet is not necessary, but the principal computations should be supported by schedules or general ledger accounts. The company uses straight-line amortization for bond interest.
Question: Collinsworth Co. reported sales on an accrual basis of \(100,000. If accounts receivable increased \)30,000 and the allowance for doubtful accounts increased \(9,000 after a write-off of \)2,000, compute cash sales.
Chapman Company, a major retailer of bicycles and accessories, operates several stores and is a publicly traded company. The comparative balance sheet and income statement for Chapman as of May 31, 2017, are as follows. The company is preparing its statement of cash flows.
CHAPMAN COMPANY
COMPARATIVE BALANCE SHEET
AS OF MAY 31
2017 2016
Current assets Cash \( 28,250 \) 20,000
Accounts receivable 75,000 58,000
Inventory 220,000 250,000
Prepaid expenses 9,000 7,000
Total current assets 332,250 335,000
Plant assets
Plant assets 600,000 502,000
Less: Accumulated depreciation鈥攑lant assets 150,000 125,000
Net plant assets 450,000 377,000
Total assets \(782,250 \)712,000
Current liabilities
Accounts payable \(123,000 \)115,000
Salaries and wages payable 47,250 72,000
Interest payable 27,000 25,000
Total current liabilities 197,250 212,000
Long-term debt
Bonds payable 70,000 100,000
Total liabilities 267,250 312,000
Stockholders鈥� equity
Common stock, \(10 par 370,000 280,000
Retained earnings 145,000 120,000
Total stockholders鈥� equity 515,000 400,000
Total liabilities and stockholders鈥� equity \)782,250 \(712,000
CHAPMAN COMPANY
INCOME STATEMENT
FOR THE YEAR ENDED MAY 31, 2017
Sales revenue \)1,255,250
Cost of goods sold 722,000
Gross profit 533,250
Expenses Salaries and wages expense 252,100
Interest expense 75,000
Depreciation expense 25,000
Other expenses 8,150
Total expenses 360,250
Operating income 173,000
Income tax expense 43,000
Net income \( 130,000
The following is additional information concerning Chapman鈥檚 transactions during the year ended May 31, 2017.
1. All sales during the year were made on account.
2. All merchandise was purchased on account, comprising the total accounts payable account.
3. Plant assets costing \)98,000 were purchased by paying \(28,000 in cash and issuing 7,000 shares of stock.
4. The 鈥渙ther expenses鈥� are related to prepaid items.
5. All income taxes incurred during the year were paid during the year.
6. In order to supplement its cash, Chapman issued 2,000 shares of common stock at par value.
7. Cash dividends of \)105,000 were declared and paid at the end of the fiscal year.
Instructions
(a) Compare and contrast the direct method and the indirect method for reporting cash flows from operating activities.
(b) Prepare a statement of cash flows for Chapman Company for the year ended May 31, 2017, using the direct method. Be sure to support the statement with appropriate calculations. (A reconciliation of net income to net cash provided is not required.)
(c) Using the indirect method, calculate only the net cash flow from operating activities for Chapman Company for the year ended May 31, 2017.
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