Question

Comparative financial statements for Wing Company follow:

Wing Company

Balance Sheets

December 31, 2018 and 2019

Current assets:    

Cash $18,000   $15,000       

Accounts receivable 25,000   22,000      

Inventory 22,000   20,000      

Prepaid expenses 10,000    14,000   

Total current assets 75,000   71,000

Long‐term assets 25,000   7,000  

Property, plant, and equipment 80,000   77,000      

Less: Accumulated depreciation (64,000) (61,000)

Net property, plant, and equipment 16,000   16,000  

Total assets 116,000   94,000  

Liabilities and Stockholdersʹ Equity Current liabilities:     

Accounts payable $8,000 6,000   

  Accrued liabilities 15,000 6,400

Total current assets 23,000 12,400

Bonds payable 18,000 12,000

Deferred income taxes 15,000 4,000

Total liabilities 56,000 28,400

Stockholdersʹ equity:     

Common stock 20,000 30,000    

Retained earnings 40,000 35,600

Total stockholdersʹ equity 60,000 65,600

Total liabilities and stockholdersʹ equity $116,000 $94,000

Wing Company

Income Statement

For the year ended December 31, 2019

Sales $70,000

Cost of goods sold 40,000

Gross margin 30,000

Depreciation expense 5,000

Other operating expenses 15,000

Net operating income 10,000

Loss on sale of equipment    4,000

Income before taxes 6,000

Income tax expense    2,400

Net income    $3,600 6

Additional data on activities during 2019 are as follows: • During 2019, Wing Company sold used equipment for $3,000 that had cost $15,000 with accumulated depreciation of $8,000. • New equipment was purchased for $12,000 cash. • Cash dividends totaling $8,000 were paid. • Long‐term investments that had cost $18,000 when purchased were sold for $18,000. • Common stock was issued for $10,000.

Question a.  Prepare the operating activities section of the statement of cash flows using the indirect method.  

b.  Prepare the operating activities section of the statement of cash flows using the direct method.

Answer 1

Answer a
The operating activities section of the statement of cash flows using the indirect method.
Cash flow from Operating activities
Net Income		$3,600.00
Adjustments
Depreciation	$5,000.00
Loss on sale of equipment	$4,000.00
Changes in working capital
Decrease in Accounts Receivables	$3,000.00
Decrease in Inventory	$2,000.00
Increase in Prepaid expenses	-$4,000.00
Decrease in Deferred Income Tax	-$11,000.00
Decrease in Accounts Payable	-$2,000.00
Decrease in Accrued Liabilities	-$8,600.00	-$11,600.00
Net Cash used for Operating activities		-$8,000.00
Answer b
The operating activities section of the statement of cash flows using the direct method.
Cash flow from Operating activities
Receipts from customers	$73,000.00
Paid to suppliers	-$40,000.00
Paid for expenses	-$27,600.00
Paid for Income Tax	-$13,400.00
Net Cash used for Operating activities	-$8,000.00