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Magazine Chapter 23: Q7P (page 1388)
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.
Short Answer
- Under the direct method, classification is done based on cash receipts and payments. In contrast, in the indirect method, non-cash expenses and losses are added, and non-cash revenues and gains are subtracted from the net income.
- Net increase in cash flow using direct method is $8,250
- Cash flow from operating activities using indirect method is computed as $151,250
Step by step solution
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