Question

Problem 23-9

Novak Corporation has contracted with you to prepare a statement of cash flows. The controller has provided the following information.

		December 31
		2017		2016
Cash		$38,600		$13,000
Accounts receivable		12,200		10,000
Inventory		11,900		9,900
Equity investments		–0–		3,000
Buildings		–0–		29,800
Equipment		40,000		20,000
Copyrights		5,100		5,200
Totals		$107,800		$90,900
Allowance for doubtful accounts		$2,900		$4,500
Accumulated depreciation—equipment		2,000		4,500
Accumulated depreciation—buildings		–0–		5,900
Accounts payable		5,100		4,000
Dividends payable		–0–		4,900
Notes payable, short-term (nontrade)		2,900		4,000
Long-term notes payable		36,000		25,000
Common stock		38,000		33,000
Retained earnings		20,900		5,100
		$107,800		$90,900

Additional data related to 2017 are as follows.

1.		Equipment that had cost $11,000 and was 30% depreciated at time of disposal was sold for $2,500.
2.		$5,000 of the long-term note payable was paid by issuing common stock.
3.		Cash dividends paid were $4,900.
4.		On January 1, 2017, the building was completely destroyed by a flood. Insurance proceeds on the building were $33,000 (net of $3,900 taxes).
5.		Equity investments (ownership is less than 20% of total shares) were sold at $1,500 above their cost. No unrealized gains or losses were recorded in 2017.
6.		Cash and long-term note for $16,000 were given for the acquisition of equipment.
7.		Interest of $2,000 and income taxes of $5,000 were paid in cash.

(a) Use the indirect method to analyze the above information and prepare a statement of cash flows for Novak. (Show amounts that decrease cash flow with either a - sign e.g. -15,000 or in parenthesis e.g. (15,000).)

NOVAK CORPORATION Statement of Cash Flows
*
*		$
Adjustments to reconcile net income to
*
*	$
*	$
*	$
*	$
*	$
*	$
*	$
*	$
		$
*		$
*
*	$
*	$
*	$
*	$
*		$
*
*	$
*	$
*		$
*		$
*		$
*		$
Supplemental disclosures of cash flow information:
*		$
*		$
*
*		$
*		$
		$

(b) What would you expect to observe in the operating, investing, and financing sections of a statement of cash flows of:

(1)		A severely financially troubled firm?
(2)		A recently formed firm that is experiencing rapid growth?

Answer 1

a)

Dingel Corporation
Statement of Cash Flows
For the Year Ended December 31, 2017
Cash flows from operating activities
Net income (20900-5100)		$15,800
Adjustments to reconcile net income
to net cash provided by operating activities:
Loss on sale of equipment ((11000*70%-2500)	$5,200
Gain from flood damage (36900-(29800-5900))	-$13,000
Depreciation expense (2000-(4500-3300))	$800
Copyright amortization	$100
Gain on sale of investments	-$1,500
Increase in accounts receivable        (10000-4500)-(12200-2900)	-$3,800
Increase in inventory	-$2,000
Increase in accounts payable	$1,100	-$13,100
Net cash provided by operating activities (a)		$2,700
Cash flows from investing activities
Sale of investments	$4,500
Sale of equipment	$2,500
Purchase of equipment	-$15,000
Proceeds from flood damage to building	$36,900
Net cash provided by investing activities (b)		$28,900
Cash flows from financing activities
Payment of dividends	-$4,900
Payment of short-term note payable	-$1,100
Net cash used by financing activities ( C)		-$6,000
Increase in cash (A+B+C)		$25,600
Cash, January 1, 2017		$13,000
Cash, December 31, 2017		$38,600

b) A severly financially troubled firm