Question

Forten Company's current year income statement, comparative balance sheets, and additional information follow. 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.

FORTEN COMPANY Comparative Balance Sheets December 31
	Current Year						Prior Year
Assets
Cash		$	60,400					$	80,500
Accounts receivable			76,340						57,625
Inventory			286,156						258,800
Prepaid expenses			1,280						2,035
Total current assets			424,176						398,960
Equipment			150,500						115,000
Accum. depreciation—Equipment			(40,125	)					(49,500	)
Total assets		$	534,551					$	464,460
Liabilities and Equity
Accounts payable		$	60,141					$	125,175
Short-term notes payable			12,100						7,400
Total current liabilities			72,241						132,575
Long-term notes payable			61,500						55,750
Total liabilities			133,741						188,325
Equity
Common stock, $5 par value			173,250						157,250
Paid-in capital in excess of par, common stock			48,000						0
Retained earnings			179,560						118,885
Total liabilities and equity		$	534,551					$	464,460

  

FORTEN COMPANY Income Statement For Current Year Ended December 31
Sales				$	617,500
Cost of goods sold					292,000
Gross profit					325,500
Operating expenses
Depreciation expense	$	27,750
Other expenses		139,400			167,150
Other gains (losses)
Loss on sale of equipment					(12,125	)
Income before taxes					146,225
Income taxes expense					34,050
Net income				$	112,175

Additional Information on Current Year Transactions

1. The loss on the cash sale of equipment was $12,125 (details in b).
2. Sold equipment costing $67,875, with accumulated depreciation of $37,125, for $18,625 cash.
3. Purchased equipment costing $103,375 by paying $44,000 cash and signing a long-term note payable for the balance.
4. Borrowed $4,700 cash by signing a short-term note payable.
5. Paid $53,625 cash to reduce the long-term notes payable.
6. Issued 3,200 shares of common stock for $20 cash per share.
7. Declared and paid cash dividends of $51,500.

Required:
1. Prepare a complete statement of cash flows using the indirect method for the current year. (Amounts to be deducted should be indicated with a minus sign.)

Answer 1

Solution:

Statement of Cash Flows (Indirect Method):

FORTEN COMPANY
Statement of Cash Flows (Indirect Method)
For the Current Year Ended December 31
Cash flows from operating activities:
Net Income	$       112,175
Adjustments to reconcile to operating cash flow
Depreciation expense	$          27,750
Loss on sale of equipment	$          12,125
Changes in operating assets and liabilities:
Increase in Account Receivables	$       (18,715)
Increase in inventory	$       (27,356)
Decrease in Prepaid Expenses	$                755
Decrease in accounts payable	$       (65,034)
Increase in Short term notes payable	$            4,700
Net cash flows from operating activities		$                46,400
Cash flow from investing activities:
Sale of equipment	$          18,625
Purchase of Equipment	$       (44,000)
Net cash flow from investing activities (B)		$              (25,375)
Cash flow from financing activities:
Issuance of common stock	$          64,000
Payment of Long term notes payable	$       (53,625)
Dividend paid to shareholders	$       (51,500)
Net Cash flow from financing activities (C )		$              (41,125)
Net increase(decrease) in cash		$              (20,100)
Cash, January 1		$                80,500
Cash, December 31		$                60,400

Working:

FORTEN COMPANY
Statement of Cash Flows (Indirect Method)
For the Current Year Ended December 31
Cash flows from operating activities:
Net Income	$       112,175
Adjustments to reconcile to operating cash flow
Depreciation expense	$          27,750
Loss on sale of equipment	$          12,125
Changes in operating assets and liabilities:
Increase in Account Receivables	57625-76340
Increase in inventory	258800-286156
Decrease in Prepaid Expenses	2035-1280
Decrease in accounts payable	60141-125175
Increase in Short term notes payable	12100-7400
Net cash flows from operating activities		$                46,400
Cash flow from investing activities:
Sale of equipment	$          18,625
Purchase of Equipment	$       (44,000)
Net cash flow from investing activities (B)		$              (25,375)
Cash flow from financing activities:
Issuance of common stock	3200*20
Payment of Long term notes payable	$       (53,625)
Dividend paid to shareholders	$       (51,500)
Net Cash flow from financing activities (C )		$              (41,125)
Net increase(decrease) in cash		$              (20,100)
Cash, January 1		$                80,500
Cash, December 31		$                60,400