Question

During the year, Hepworth Company earned a net income of $59,225. Beginning and ending balances for the year for selected accounts are as follows:

	Account
	Beginning	Ending
Cash	$108,000	$125,600
Accounts receivable	66,600	99,150
Inventory	36,800	52,500
Prepaid expenses	27,200	29,400
Accumulated depreciation	81,900	92,500
Accounts payable	45,300	54,425
Wages payable	26,000	15,100

There were no financing or investing activities for the year. The above balances reflect all of the adjustments needed to adjust net income to operating cash flows.

Required:

1.	Prepare a schedule of operating cash flows using the indirect method.
2.	Suppose that all the data used in Requirement 1 except the ending accounts payable and cash balances are not known. Assume also that you know that the operating cash flow for the year was $20,075. What is the ending balance of accounts payable?
3.	Conceptual Connection: Hepworth has an opportunity to buy some equipment that will significantly increase productivity. The equipment costs $25,000. Assuming exactly the same data used for Requirement 1, can Hepworth buy the equipment using this year’s operating cash flows?

X

Amount Descriptions

Refer to the list below for the exact wording of an amount description within your Statement of Cash Flows.

Amount Descriptions
Decrease in accounts payable
Decrease in accounts receivable
Decrease in inventory
Decrease in wages payable
Depreciation expense
Increase in accounts payable
Increase in accounts receivable
Increase in inventory
Increase in wages payable
Net cash from operating activities
Net income
Net loss

X

Operating Cash Flows - Indirect Method

1. Prepare a schedule of operating cash flows using the indirect method. (Note: Use a minus sign to indicate any decreases in cash or cash outflows. Refer to the Amount Descriptions list provided for the exact wording of the answer choices for text entries.)

Hepworth Company

Schedule of Operating Cash Flows

1	Cash flows from operating activities:
2
3	Add (deduct) adjusting items:
4
5
6
7
8
9
10

Final questions

2. Suppose that all the data used in Requirement 1 except the ending accounts payable and cash balances are not known. Assume also that you know that the operating cash flow for the year was $20,075. What is the ending balance of accounts payable?

3. Conceptual Connection: Hepworth has an opportunity to buy some equipment that will significantly increase productivity. The equipment costs $25,000. Assuming exactly the same data used for Requirement 1, can Hepworth buy the equipment using this year’s operating cash flows?

Answer 1

1)

CASH FLOW STATEMENT

PARTICULARS	AMOUNT
CASH FLOW FROM OPERATING ACTIVITY
NET INCOME	59,225
DEPRECIATION EXPENSE	10,600
Add (deduct) adjusting items:
(INCREASE) DECREASE IN CURRENT ASSET
INCREASE IN CASH	(17,600)
INCREASE IN ACCOUNTS RECEIVABLE	(32,550)
INCREASE IN INVENTORY	(15,700)
INCREASE IN PREPAID EXPENSES	(2,200)
INCREASE (DECREASE) IN CURRENT LIABILITY
INCREASE IN ACCOUNTS PAYABLE	9,125
DECREASE IN WAGES PAYABLE	(10,900)
NET CASH FLOW FROM OPERATING ACTIVITY	-
NET CASH FLOW FROM INVESTING ACTIVITY	-
NET CASH FLOW FROM FINANCING ACTIVITY	-
NET INCREASE (DECREASE) IN CASH	(10,900)
BEGINNING CASH BALANCE	108,000
ENDING CASH BALANCE	97,100

NOTES

PARTICULARS	BEGINNING	ENDING	DURING THE YEAR
CASH	108,000	125,600	17,600
ACCOUNTS RECEIVABLE	66,600	99,150	32,550
INVENTORY	36,800	52,500	15,700
PREPAID EXPENSES	27,200	29,400	2,200
ACCUMULATED DEPRECIATION	81,900	92,500	10,600
ACCOUNTS PAYABLE	45,300	54,425	9,125
WAGES PAYABLE	26,000	15,100	(10,900)

2)

CASH FLOW STATEMENT

PARTICULARS	AMOUNT
NET INCOME	59,225
DEPRECIATION EXPENSE	10,600
Add (deduct) adjusting items:
(INCREASE) DECREASE IN CURRENT ASSET
INCREASE IN CASH (108,000 - 128,075)	(20,075)
INCREASE IN ACCOUNTS RECEIVABLE	(32,550)
INCREASE IN INVENTORY	(15,700)
INCREASE IN PREPAID EXPENSES	(2,200)
INCREASE (DECREASE) IN CURRENT LIABILITY
INCREASE IN ACCOUNTS PAYABLE	A - 45,300
DECREASE IN WAGES PAYABLE	(10,900)
NET CASH FLOW FROM OPERATING ACTIVITY	20,075
NET CASH FLOW FROM INVESTING ACTIVITY	-
NET CASH FLOW FROM FINANCING ACTIVITY	-
NET INCREASE (DECREASE) IN CASH	20,075
BEGINNING CASH BALANCE	108,000
ENDING CASH BALANCE	128,075

Let ending balance of Accounts payable be A

A - 56,850 = 20,075

A = 76,925

So, ending balance of Accounts payable = 76,925

3) this year operating cash flow is (10,900). So, Hepworth cannot buy equipment that will significantly increase productivity costing $25,000 from this year operating cash flow as operating cash flow is already negative.