Question

Statement of Cash Flows (Indirect Method) The Wolff Company’s income statement and comparative balance sheets at December 31 of 2016 and 2015 are shown below:

WOLFF COMPANY Income Statement For the Year Ended December 31, 2016
Sales Revenue		$645,000
Cost of Goods Sold	$430,000
Wages Expense	86,000
Insurance Expense	12,000
Depreciation Expense	13,000
Interest Expense	12,000
Income Tax Expense	29,000	582,000
Net Income		$63,000

WOLFF COMPANY Balance Sheets
	Dec. 31, 2016	Dec. 31, 2015
Assets
Cash	$52,000	$8,000
Accounts Receivable	41,000	32,000
Inventory	90,000	60,000
Prepaid Insurance	5,000	7,000
Plant Assets	219,000	195,000
Accumulated Depreciation	(68,000)	(55,000)
Total Assets	$339,000	$247,000
Liabilities and Stockholders’ Equity
Accounts Payable	$7,000	$10,000
Wages Payable	9,000	6,000
Income Tax Payable	6,000	7,000
Bonds Payable	141,000	75,000
Common Stock	90,000	90,000
Retained Earnings	86,000	59,000
Total Liabilities and Stockholders’ Equity	$339,000	$247,000

Cash dividends of $36,000 were declared and paid during 2016. Plant assets were purchased for cash and bonds payable were issued for cash. Bond interest is paid semi‑annually on June 30 and December 31. Accounts payable relate to merchandise purchases.

Required
a. Calculate the change in cash that occurred during 2016.
b. Prepare a statement of cash flows using the indirect method.
c. Compute free cash flow.
d. Compute the operating‑cash‑flow‑to‑current‑liabilities ratio.
e. Compute the operating‑cash‑flow‑to‑capital‑expenditures ratio.

a. Change in Cash during 2016 $Answer AnswerIncreaseDecrease

b. Use a negative sign with cash outflow answers.

WOLFF COMPANY Statement of Cash Flows For Year Ended December 31, 2016
Cash Flow from Operating Activities
Net Income		Answer
Add (deduct) items to convert net income to cash basis
Depreciation		Answer
Accounts Receivable	AnswerIncreaseDecrease	Answer
Inventory	AnswerIncreaseDecrease	Answer
Prepaid Insurance	AnswerIncreaseDecrease	Answer
Accounts Payable	AnswerIncreaseDecrease	Answer
Wages Payable	AnswerIncreaseDecrease	Answer
Income Tax Payable	AnswerIncreaseDecrease	Answer
Cash Flow Provided by Operating Activities		Answer
Cash Flow from Investing Activities
Purchase of Plant Assets		Answer
Cash Flow from Financing Activities
Issuance of Bonds Payable		Answer
Payment of Dividends		Answer
Cash Provided by Financing Activities		Answer
Net Change in Cash		Answer
Cash at Beginning of Year		Answer
Cash at End of Year		Answer

c. Free cash flow $Answer

d. Operating-cash-flow-to-current-liabilities ratio.
Round answer to two decimal places.
Answer

e. Operating-cash-flow-to-capital-expenditures ratio.
Round answer to two decimal places.
Answer

Answer 1

a. Change in cash = Increase $44000 i.e. $52000 - 8000

b.

Cash Flow Statement
Indirect Method
Cash flow from Operating Activities
Net Income		$          63,000
Adjustments
Depreciation	$            13,000
Increase in Accounts Receivable	$            -9,000
Increase in Inventory	$          -30,000
Decrease in Prepaid Insurance	$              2,000
Decrease in Accounts payable	$            -3,000
Increase in Wages Payable	$              3,000
Decrease in Income Tax Payable	$            -1,000
Total Adjustments		$        -25,000
Net Cash from operating activities			$            38,000
Cash flow from Investing Activities
Purchase of Plant assets		$        -24,000
Net Cash used in investing activities			$          -24,000
Cash flow from Financing Activities
Issue of Bonds Payable		$          66,000
Payment of cash dividends		$        -36,000
Net Cash from financing activities			$            30,000
Net Increase in cash			$            44,000
Beginning Balance of Cash			$              8,000
Ending Balance of Cash			$            52,000

c. Free cash flow = Net Cash from Operating Activities - Capital Expenditure
= $38000 - 24000 = $14000

d. Operating-cash-flow-to-current-liabilities ratio = $38000 / 22000 = 1.72

e. Operating-cash-flow-to-capital-expenditures ratio = $38000 / 24000 = 1.58