Question

12-3

Forten Company, a merchandiser, recently completed its calendar-year 2017 operations. For the year, (1) all sales are credit sales, (2) all credits to Accounts Receivable reflect cash receipts from customers, (3) all purchases of inventory are on credit, (4) all debits to Accounts Payable reflect cash payments for inventory, and (5) Other Expenses are paid in advance and are initially debited to Prepaid Expenses. The company’s income statement and balance sheets follow.

FORTEN COMPANY Comparative Balance Sheets December 31, 2017 and 2016
	2017				2016
Assets
Cash	$	49,800			$	73,500
Accounts receivable		65,810				50,625
Inventory		275,656				251,800
Prepaid expenses		1,250				1,875
Total current assets		392,516				377,800
Equipment		157,500				108,000
Accum. depreciation—Equipment		(36,625	)			(46,000	)
Total assets	$	513,391			$	439,800
Liabilities and Equity
Accounts payable	$	53,141			$	114,675
Short-term notes payable		10,000				6,000
Total current liabilities		63,141				120,675
Long-term notes payable		65,000				48,750
Total liabilities		128,141				169,425
Equity
Common stock, $5 par value		162,750				150,250
Paid-in capital in excess of par, common stock		37,500				0
Retained earnings		185,000				120,125
Total liabilities and equity	$	513,391			$	439,800

  

FORTEN COMPANY Income Statement For Year Ended December 31, 2017
Sales				$	582,500
Cost of goods sold					285,000
Gross profit					297,500
Operating expenses
Depreciation expense	$	20,750
Other expenses		132,400			153,150
Other gains (losses)
Loss on sale of equipment					(5,125	)
Income before taxes					139,225
Income taxes expense					24,250
Net income				$	114,975

Additional Information on Year 2017 Transactions

1. The loss on the cash sale of equipment was $5,125 (details in b).
2. Sold equipment costing $46,875, with accumulated depreciation of $30,125, for $11,625 cash.
3. Purchased equipment costing $96,375 by paying $30,000 cash and signing a long-term note payable for the balance.
4. Borrowed $4,000 cash by signing a short-term note payable.
5. Paid $50,125 cash to reduce the long-term notes payable.
6. Issued 2,500 shares of common stock for $20 cash per share.
7. Declared and paid cash dividends of $50,100.

Required:
1. Prepare a complete statement of cash flows; report its operating activities using the indirect method. (Amounts to be deducted should be indicated with a minus sign.)

FORTEN COMPANYStatement of Cash FlowsFor Year Ended December 31, 2017Cash flows from operating activitiesNet income$114,975Adjustments to reconcile net income to net cash provided by operations:Accounts payable decrease20,750Accounts receivable increase5,125Cash paid for dividendsCash borrowed on short-term note$140,850Cash flows from investing activities0Cash flows from financing activities:0Net increase (decrease) in cash$140,850Cash balance at beginning of yearCash balance at end of year$140,850

Answer 1