Question

Comparative balance sheets and the statement of income and retained earnings for Bayshore Industries, Inc. are presented below. Use this information to answer the subsequent questions.

Bayshore Industries, Inc.
BALANCE SHEETS
December 31, Year 2 and Year 1
	Year 2	Year 1	Change
Assets
Current assets
Cash and cash equivalents	$216,000	$144,000	$72,000
Trade receivables—net	3,434,000	1,971,000	1,463,000
Inventory	810,000	216,000	594,000
Prepaid expenses	18,000	0	18,000
Total current assets	4,478,000	2,331,000	2,147,000
Property and equipment	7,780,000	7,740,000	40,000
Less: accumulated depreciation	576,000	455,000	121,000
Property and equipment—net	7,204,000	7,285,000	(81,000)
Intangibles, less accumulated amortization of $14,400—Year 2 and $7,200—Year 1	21,600	28,800	(7,200)
Total assets	$11,703,600	$9,644,800	$2,058,800
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable and accrued expenses	$872,600	$396,800	$475,800
Line of credit	108,000	90,000	18,000
Current portion of long-term debt	29,000	27,000	2,000
Total current liabilities	1,009,600	513,800	495,800
Long-term debt	3,069,000	3,098,000	(29,000)
Total liabilities	4,078,600	3,611,800	466,800
Stockholders' equity
Common stock	9,000	9,000	0
Additional paid-in capital	5,400,000	5,400,000	0
Retained earnings	2,216,000	624,000	1,592,000
Total stockholders' equity	7,625,000	6,033,000	1,592,000
Total liabilities and stockholders' equity	$11,703,600	$9,644,800	$2,058,800

  

Bayshore Industries, Inc.
STATEMENT OF INCOME AND RETAINED EARNINGS
For the year ended December 31, Year 2
Net sales	$19,800,000
Cost of sales	9,000,000
Gross profit on sales	10,800,000
Operating expenses
Selling expenses	3,600,000
General and administrative expenses	4,050,000
Other operating expenses	393,300
Total operating expenses	8,043,300
Operating income	2,756,700
Other income and expenses
Gain/loss on property and equipment disposal	18,000
Interest income	9,000
Interest expense	(252,000)
Other income and expenses—net	(225,000)
Income before income taxes	2,531,700
Provision for income taxes	759,700
Net income	1,772,000
Retained earnings—beginning	624,000
Dividends paid	(180,000)
Retained earnings—ending	$2,216,000

  

Additional information on transactions during the year ended December 31, Year 2:

All accounts receivable relate to customer sales

All accounts payable relate to suppliers

All fixed assets were acquired for cash

A building with an original cost of $360,000 and accumulated depreciation of $319,500 was sold for $58,500

The company had no new long-term debt in Year 2

Interest paid in the current year was $250,000

Cash paid for income taxes in the current year was $700,000

There were no non-cash financing or investing activities during the year

Using the indirect method, prepare the portions of the Statement of Cash Flows of Bayshore Industries, Inc. shown below for the year ended December 31, Year 2.

Answer 1

Bayshore Industries Inc.
Statement of Cash flows for the year ended December 31, Year 2
Cash flows from Operations
Net Income	1,772,000
Increase in Trade receivables, net	(1,463,000)
Increase in Inventory	(594,000)
Increase in prepaid expenses	(18,000)
Increase in Accounts Payable and accrued expenses	475,800
Increase in Line of credit	18,000
Increase in current portion of long term debt	2,000
Gain on sale of building	(18,000)
Amortization	7,200
Depreciation	440,500
Net cash from operating activities	622,500
Cash flows from Investing activities
Purchases of Fixed Assets	(400,000)
Proceeds from sale of building	58,500
Net Cash flows used in Investing activities	(341,500)
Cash flows from financing activities
Repayment if loan	(29,000)
Dividends paid	(180,000)
Net Cash flows used in Financing activities	(209,000)
Net cash increase in cash and cash equivalents	72,000
Beginning Cash balance	144,000
Ending cash balance	216,000

Notes:

1. Amortization expense for the year = Balance in accumulated amortization in Year 2 - Year 1= 14,400 -7,200 = 7.200

2. Depreciation calculation:

Accumulated depreciaiton beginning balance	455,000
+ Accumulated depreciation of building sold	319,500
Net (a)	135,500
Accumulated depreciaion balance at the end of year 2 (b)	576,000
Depreciation expense for the year (b-a)	440,500

3. Purchase of fixed assets during the year calculation:

Fixed assets beginning balance	7,740,000
Less: Original cost of building sold	360,000
Net fixed assets (a)	7,380,000
Fixed assets ending balance (b)	7,780,000
Purchases made (b-a)	400,000

4. The difference between interest expense and interest paid (252000-250000=2000) is not considered separately as they are a part of accrued expenses, which is considered in total. Similarly, difference between income tax expense and actual payment is not considered too.