Question

The comparative balance sheet of Livers Inc. for December 31, 20Y3 and 20Y2, is as follows:

	Dec. 31, 20Y3	Dec. 31, 20Y2
2	Assets
3	Cash	$155,000.00	$150,000.00
4	Accounts receivable (net)	450,000.00	400,000.00
5	Inventories	770,000.00	750,000.00
6	Investments	0.00	100,000.00
7	Land	500,000.00	0.00
8	Equipment	1,400,000.00	1,200,000.00
9	Accumulated depreciation-equipment	(600,000.00)	(500,000.00)
10	Total assets	$2,675,000.00	$2,100,000.00
11	Liabilities and Stockholders’ Equity
12	Accounts payable (merchandise creditors)	$340,000.00	$300,000.00
13	Accrued expenses payable (operating expenses)	45,000.00	50,000.00
14	Dividends payable	30,000.00	25,000.00
15	Common stock, $4 par	700,000.00	600,000.00
16	Paid-in capital in excess of par—common stock	200,000.00	175,000.00
17	Retained earnings	1,360,000.00	950,000.00
18	Total liabilities and stockholders’ equity	$2,675,000.00	$2,100,000.00

The income statement for the year ended December 31, 20Y3, is as follows:

1	Sales		$3,000,000.00
2	Cost of goods sold		(1,400,000.00)
3	Gross profit		$1,600,000.00
4	Operating expenses:
5	Depreciation expense	$100,000.00
6	Other operating expenses	950,000.00
7	Total operating expenses		(1,050,000.00)
8	Operating income		$550,000.00
9	Other income:
10	Gain on sale of investments		75,000.00
11	Income before income tax		$625,000.00
12	Income tax expense		(125,000.00)
13	Net income		$500,000.00

Additional data obtained from an examination of the accounts in the ledger for 20Y3 are as follows:

	a. The investments were sold for $175,000 cash.
	b. Equipment and land were acquired for cash.
	c. There were no disposals of equipment during the year.
	d. The common stock was issued for cash.
	e. There was a $90,000 debit to Retained Earnings for cash dividends declared.

Labels

Cash paid for dividends
Cash paid for purchase of equipment
Cash paid for purchase of land
Cash paid for purchase of treasury stock
Cash payments for income taxes
Cash payments for merchandise
Cash payments for operating expenses
Cash received from customers
Cash received from sale of common stock
Cash received from sale of investments
December 31, 20Y3
Depreciation
For the Year Ended December 31, 20Y3
Gain on sale of investments
Issuance of common stock for acquisition of land
Issuance of common stock for purchase of equipment
Loss on sale of investments
Net cash flow from financing activities
Net cash flow from investing activities
Net cash flow from operating activities
Net cash flow used for financing activities
Net cash flow used for investing activities
Net cash flow used for operating activities
Net decrease in cash
Net increase in cash

Prepare a statement of cash flows

Cash flows from (used for) operating activities:
2
3
4
5
6
7
8	Cash flows from (used for) investing activities:
9
10
11
12
13
14	Cash flows from (used for) financing activities:
15
16
17
18
19	Cash balance, January 1, 20Y3
20	Cash balance, December 31, 20Y3

Answer 1

Solution :

Cash Flow Statement ( Direct Method )

for year ending 31 Dec 2013

	Details	Amount in $	Amount in $
	Cash flow from operating activities :
	Cash Received from customers	2,950,000
	Less : Cash Payment for merchandise	( 1,380,000 )
	Less: Cash Payment for operating Exp	( 955,000 )
	Less: Cash payment for income tax	( 125,000 )
A.	Net Cash Flow from Operating Activities	490,000	490,000
	Cash flow from Investing activities :
	Cash received from Sale of Investment	175,000
	Cash Paid for Purchase of Land	( 500,000)
	Cash Paid for Purchase of Equipment	( 200,000)
B.	Net Cash Used for Investing Activities	( 525,000 )	( 525,000 )
	Cash flow from Financing activities :
	Cash payment for Dividend	( 85,000 )
	Cash Received from issuance of Common Stock	125,000
C.	Net Cash Used for Financing Activities	40,000	40,000
D.	Net Increase in cash ( A + B + C )		$ 5,000
E.	Add: Cash Balance in begining of the period		$150,000
F	Cash Balance at Closing of the year ( D + E )		$155,000

Working notes :

1. Cash received from Customers = Sales + Opening Account Receivables - Closing Account Receivables

=$ 3,000,000 + 4,000,000 - 4,500,000 = $ 2,500,000

2. Cash Payment for merchandise = Purchases + Opening Accounts payable - Closing Accounts payable

= Cost of goods sold - Opening inventory + Closing inventory + Opening Accounts payable - Closing Accounts payable

=1,400,000 - 750,000 + 770,000 + 300,000 - 340,000 = $ 1,380,000

3.Cash paid for operating Expenses = Operating Expenses for the year + opening Accrued Expenses - Closing Accrued Expenses

= $ 950,000 + 50,000 - 45,000 = $ 955,000

1. Purchase of Land = Closing balance - opening balance = $ 500,000 - $ 0 = $ 500,000

2. Purchase of Equipment = Closing balance - opening balance = $ 1,400,000 - $ 1,200,000 = $ 200,000

3. Dividend paid= Opening dividend payable balance + dividend declared - closing dividend payable balance

= $ 25,000 + 90,000 - 30,000 = $ 85,000

4. Cash Received from issuance of Common Stock = Increase in common stock + increase in additional paid in capital balance.

= $ 100,000 + $ 25,000 = $ 125,000

Cash Flow Statement ( Indirect method )

for year ending 31 Dec 2013

	Details	Amount in $	Amount in $
	Cash flow from operating activities :
	Net Income	500,000
	Add: Depreciation	100,000
	Less : Gain on Sale of Investment	(75,000)
	Net operating Income before Working Capital Changes	525,000
	Less: Increase in Account Receivable	(50,000)
	Less: Increase in Inventories	(20,000)
	Less: Decrease in Accrued Exenses payable	(5,000)
	Add: Increase in Account Payables	40,000
A.	Net Cash Flow from Operating Activities	490,000	490,000
	Cash flow from Investing activities :
	Cash received from Sale of Investment	175,000
	Cash Paid for Purchase of Land	( 500,000)
	Cash Paid for Purchase of Equipment	( 200,000)
B.	Net Cash Used for Investing Activities	( 525,000 )	( 525,000 )
	Cash flow from Financing activities :
	Dividend Paid	( 85,000 )
	Cash Received from issuance of Common Stock	125,000
C.	Net Cash Used for Financing Activities	40,000	40,000
D.	Net Increase in cash ( A + B + C )		$ 5,000
E.	Add: Cash Balance in begining of the period		$150,000
F	Cash Balance at Closing of the year ( D + E )		$155,000

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