Question

The Diversified Portfolio Corporation provides investment advice to customers. A condensed income statement for the year ended December 31, 2018, appears below:

Service revenue	$	1,220,000
Operating expenses		900,000
Income before income taxes		320,000
Income tax expense		96,000
Net income	$	224,000

The following balance sheet information also is available:

	12/31/18			12/31/17
Cash	$	439,000		$	90,000
Accounts receivable		160,000			120,000
Accounts payable (operating expenses)		110,000			80,000
Income taxes payable		30,000			55,000

In addition, the following transactions took place during the year:

1. Common stock was issued for $140,000 in cash.
2. Long-term investments were sold for $70,000 in cash. The original cost of the investments also was $70,000.
3. $100,000 in cash dividends was paid to shareholders.
4. The company has no outstanding debt, other than those payables listed above.
5. Operating expenses include $50,000 in depreciation expense.

Required:
1. Prepare a statement of cash flows for 2018 for the Diversified Portfolio Corporation. Use the direct method for reporting operating activities.
2. Prepare the cash flows from operating activities section of Diversified’s 2018 statement of cash flows using the indirect method.

Answer 1

1.

DIVERSIFIED PORTFOLIO CORPORATION
Statement of Cash Flows
For the Year Ended December 31, 2018
Cash Flows from Operating Activities
Cash receipts from customers	1180000
Cash paid for operating expenses	-820000
Cash paid for income taxes	-121000
Net cash provided by operating activities		239000
Cash Flows from Investing Activities
Sale of long-term investments	70000
Net cash provided by investing activities		70000
Cash Flows from Financing Activities
Issuance of Common stock	140000
Payment of cash dividends	-100000
Net cash provided by financing activities		40000
Net increase (decrease) in cash		349000
Cash balance, December 31, 2017		90000
Cash balance, December 31, 2018		439000

Working:

Cash receipts from customers:
Service Revenue	1220000
Less: Increase in Accounts Receivable	40000
	1180000
Cash paid for operating expenses:
Operating expenses	900000
Less: Depreciation expense	50000
Cash operating expenses	850000
Less: Increase in Accounts payable	30000
	820000
Cash paid for income taxes:
Income tax expense	96000
Add: Decrease in income taxes payable	25000
	121000

2.

DIVERSIFIED PORTFOLIO CORPORATION
Statement of Cash Flows (Partial)
For the Year Ended December 31, 2018
Cash Flows from Operating Activities
Net income		224000
Adjustments to reconcile net income to net cash provided by operations:
Depreciation expense	50000
Increase in Accounts Receivable	-40000
Increase in Accounts payable	30000
Decrease in Income taxes payable	-25000	15000
Net cash provided by operating activities		239000