Question

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 $ 52,900 $ 75,500 Accounts receivable 68,810 52,625 Inventory 278,656 253,800 Prepaid expenses 1,270 1,995 Total current assets 401,636 383,920 Equipment 155,500 110,000 Accum. depreciation—Equipment (37,625 ) (47,000 ) Total assets $ 519,511 $ 446,920 Liabilities and Equity Accounts payable $ 55,141 $ 117,675 Short-term notes payable 10,600 6,400 Total current liabilities 65,741 124,075 Long-term notes payable 64,000 50,750 Total liabilities 129,741 174,825 Equity Common stock, $5 par value 166,750 152,250 Paid-in capital in excess of par, common stock 39,500 0 Retained earnings 183,520 119,845 Total liabilities and equity $ 519,511 $ 446,920 FORTEN COMPANY Income Statement For Year Ended December 31, 2017 Sales $ 592,500 Cost of goods sold 287,000 Gross profit 305,500 Operating expenses Depreciation expense $ 22,750 Other expenses 134,400 157,150 Other gains (losses) Loss on sale of equipment (7,125 ) Income before taxes 141,225 Income taxes expense 27,050 Net income $ 114,175 Additional Information on Year 2017 Transactions The loss on the cash sale of equipment was $7,125 (details in b). Sold equipment costing $52,875, with accumulated depreciation of $32,125, for $13,625 cash. Purchased equipment costing $98,375 by paying $34,000 cash and signing a long-term note payable for the balance. Borrowed $4,200 cash by signing a short-term note payable. Paid $51,125 cash to reduce the long-term notes payable. Issued 2,700 shares of common stock for $20 cash per share. Declared and paid cash dividends of $50,500. 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.)

2. Prepare a complete statement of cash flows; report its operating activities according to the direct method. (Amounts to be deducted should be indicated with a minus sign.)

Answer 1

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Part a. Direct Method
Cash flows from operating activities
Cash received from customers (Working-1)			$ 576,315
Cash paid to suppliers (Working-2)		$                                                     374,390
Cash paid for other expense (Working-3)		$                                                     133,675
Cash paid for taxes		$                                                       27,050	$-535,115
Net cash provided by operating activities			$    41,200
Cash flows from investing activities
Proceeds on sale of equipment (Working-5)		$                                                       13,625
Purchase of equipment (Working-6)		$                                                      -34,000
Net cash used by investing activities			$ -20,375
Cash flows from financing activities
Issue of Common Stock		$                                                       54,000
Short Term note payable issue		$                                                          4,200
Principal payments on long-term loan		$                                                      -51,125
Dividend paid		$                                                      -50,500
Net cash used by financing activities			$ -43,425
Net increase in cash and cash equivalents			$ -22,600
Cash and cash equivalents, Beginning			$    75,500
Cash and cash equivalents, Ending			$    52,900
Working:
(1)   Cash received from customers
Sales revenue		$                                                     592,500
Less: Increase in accounts receivable		$                                                      -16,185
Cash received from customers		$                                                     576,315
(2)             Cash paid to suppliers
Cost of goods sold		$                                                     287,000
Add: Increase in Inventory		$                                                       24,856
		$                                                     311,856
Add: Decrease in Accounts Payable		$                                                       62,534
Cash paid to suppliers for goods		$                                                     374,390
(3) Cash paid for Other Expense
Other Expense		$                                                     134,400
Less: Decrease in Prepaid Expense		$                                                           -725
Cash paid to and on behalf of employees		$                                                     133,675
(5)          Calculation of proceeds from sale of equipment:
Cost of equipment sold		$                                                       52,875
Accumulated depreciation of equipment sold		$                                                      -32,125
Carrying amount of equipment sold		$                                                       20,750
Loss on Sale of Equipment		$                                                        -7,125
Proceeds on sale of equipment		$                                                       13,625
Part b. Indirect Method
Cash flows from operating activities
Net income			$ 114,175
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation expense		$                                                       22,750
Loss on sale of equipment		$                                                          7,125
Increase in accounts receivable		$                                                      -16,185
Increase in inventory		$                                                      -24,856
Decrease in prepaid Expense		$                                                             725
Decrease in accounts payable		$                                                      -62,534
Total adjustments			$ -72,975
Net cash provided by operating activities			$    41,200
Cash flows from investing activities:
Proceeds on sale of equipment		$                                                       13,625
Purchase of equipment		$                                                      -34,000
Net cash used by investing activities			$ -20,375
Cash flows from financing activities:
Issue of Common Stock		$                                                       54,000
Short Term note payable issue		$                                                          4,200
Principal payments on long-term loan		$                                                      -51,125
Dividend paid		$                                                      -50,500
Net cash used by financing activities			$ -43,425
Net increase in cash and cash equivalents			$ -22,600
Cash and cash equivalents, Beginning			$    75,500
Cash and cash equivalents,Ending			$    52,900