Question

Exercise 23-13 Ayayai Inc., a greeting card company, had the following statements prepared as of December 31, 2017. AYAYAI INC. COMPARATIVE BALANCE SHEET AS OF DECEMBER 31, 2017 AND 2016 12/31/17 12/31/16 Cash $6,000 $7,100 Accounts receivable 61,400 51,500 Short-term debt investments (available-for-sale) 34,600 18,000 Inventory 40,300 60,200 Prepaid rent 4,900 4,000 Equipment 152,400 130,600 Accumulated depreciation—equipment (34,800 ) (25,200 ) Copyrights 45,700 49,800 Total assets $310,500 $296,000 Accounts payable $46,100 $40,300 Income taxes payable 4,000 6,000 Salaries and wages payable 7,900 4,000 Short-term loans payable 8,100 10,000 Long-term loans payable 59,700 69,600 Common stock, $10 par 100,000 100,000 Contributed capital, common stock 30,000 30,000 Retained earnings 54,700 36,100 Total liabilities & stockholders’ equity $310,500 $296,000 AYAYAI INC. INCOME STATEMENT FOR THE YEAR ENDING DECEMBER 31, 2017 Sales revenue $333,450 Cost of goods sold 174,300 Gross profit 159,150 Operating expenses 118,800 Operating income 40,350 Interest expense $11,600 Gain on sale of equipment 2,000 9,600 Income before tax 30,750 Income tax expense 6,150 Net income $24,600 Additional information: 1. Dividends in the amount of $6,000 were declared and paid during 2017. 2. Depreciation expense and amortization expense are included in operating expenses. 3. No unrealized gains or losses have occurred on the investments during the year. 4. Equipment that had a cost of $19,800 and was 70% depreciated was sold during 2017. Prepare a statement of cash flows using the direct method.

Answer 1

AYAYAI INC.
Statement of Cash Flows
For the Year Ended December 31, 2017
(Direct Method)
Cash Flows from Operating Activities
Cash receipts from customers	323550
Cash paid for merchandise	-148600
Cash paid for operating expenses	-88240
Cash paid for interest	-11600
Cash paid for income taxes	-8150
Net cash provided by operating activities		66960
Cash Flows from Investing Activities
Purchase of available-for-sale investments	-16600
Purchase of equipment	-41600
Sale proceeds of equipment	7940
Net cash used by investing activities		-50260
Cash Flows from Financing Activities
Repayment of short-term loans	-1900
Repayment of long-term loans	-9900
Payment of cash dividends	-6000
Net cash used by financing activities		-17800
Net increase (decrease) in cash		-1100
Cash balance, December 31, 2016		7100
Cash balance, December 31, 2017		6000

Workings:

Sale proceeds of equipment:
Cost	19800
Less: Accumulated depreciation (70% x $19800)	13860
Book value	5940
Plus gain on sale of equipment	2000
Sale proceeds of equipment $	7940

Purchase of equipment = $152400 - ($130600 - $19800) = $152400 - $110800 = $41600

Depreciation expense = $34800 - ($25200 - $13860) = $34800 - $11340 = $23460

Amortization expense = $49800 - $45700 = $4100

Total depreciation and amortization expense included in operating expenses = $23460 + $4100 = $27560

Cash receipts from customers
Sales Revenue	333450
Less: Increase in Accounts Receivable	9900
	323550
Cash paid for merchandise
Cost of goods sold	174300
Less: Decrease in Inventory	19900
Less: Increase in Accounts Payable	5800
	148600
Cash paid for operating expenses
Operating expenses	118800
Less: Depreciation and amortization expense	27560
	91240
Add: Increase in prepaid rent	900
Less: Increase in salaries and wages payable	3900
	88240
Cash paid for income taxes
Income tax expense	6150
Add: Decrease in Income taxes payable	2000
	8150