Question

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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	$	79,900			$	93,500
Accounts receivable		95,970				70,625
Inventory		305,656				271,800
Prepaid expenses		1,410				2,295
Total current assets		482,936				438,220
Equipment		137,500				128,000
Accum. depreciation—Equipment		(46,625	)			(56,000	)
Total assets	$	573,811			$	510,220
Liabilities and Equity
Accounts payable	$	73,141			$	144,675
Short-term notes payable		16,000				10,000
Total current liabilities		89,141				154,675
Long-term notes payable		55,000				68,750
Total liabilities		144,141				223,425
Equity
Common stock, $5 par value		202,750				170,250
Paid-in capital in excess of par, common stock		57,500				0
Retained earnings		169,420				116,545
Total liabilities and equity	$	573,811			$	510,220

  

FORTEN COMPANY Income Statement For Year Ended December 31, 2017
Sales				$	682,500
Cost of goods sold					305,000
Gross profit					377,500
Operating expenses
Depreciation expense	$	40,750
Other expenses		152,400			193,150
Other gains (losses)
Loss on sale of equipment					(25,125	)
Income before taxes					159,225
Income taxes expense					52,250
Net income				$	106,975

Additional Information on Year 2017 Transactions

1. The loss on the cash sale of equipment was $25,125 (details in b).
2. Sold equipment costing $106,875, with accumulated depreciation of $50,125, for $31,625 cash.
3. Purchased equipment costing $116,375 by paying $70,000 cash and signing a long-term note payable for the balance.
4. Borrowed $6,000 cash by signing a short-term note payable.
5. Paid $60,125 cash to reduce the long-term notes payable.
6. Issued 4,500 shares of common stock for $20 cash per share.
7. Declared and paid cash dividends of $54,100.

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.)
  

Answer 1

Solution:

FORTEN COMPANY
Statement of Cash Flows
For the Year ended December 31, 2017
Particulars	Details	Amount
Cash Flow from Operating Activities:
Net Income	$1,06,975.00
Adjustments to reconcile net income to cash flow from operating activities:
Income statement items not effecting cash:
Depreciation	$40,750.00
Loss on sale of Equipment	$25,125.00
Changes in current assets and Current liabilities:
Increase in Accounts Receivables ($70625 - $95970)	-$25,345.00
Increase in Inventory ($271800-305656)	-$33,856.00
Decrease in Prepaid Expenses ($2295-1410)	$885.00
Decrease In Accounts Payable ($73141 - $144675)	-$71,534.00
Increase in Short term note payable ($16000-10000)	$6,000.00
Net Cash Flow From Operating Activities (A)		$49,000.00
Cash Flow from Investing Activities:
Cash Received from sale of Equipment	$31,625.00
Purchase of Equipment (In cash)	-$70,000.00
Net Cash Flow From Investing Activities (B)		-$38,375.00
Cash Flow from Financing Activities:
Repayment of Long Term Note Payable	-$60,125.00
Cash received from issue of common stock (4500*$20)	$90,000.00
Dividend paid	-$54,100.00
Net Cash Flow From Financing Activities (C)		-$24,225.00
Total Cash flow from all activities (A+B+C)		-$13,600.00
Cash at the beginning of the year		$93,500.00
Cash at the end of year		$79,900.00