Question

The Diversified Portfolio Corporation provides investment advice to customers. A condensed income statement for the year ended December 31, 2018, appears below:

Service revenue	$	1,220,000
Operating expenses		860,000
Income before income taxes		360,000
Income tax expense		72,000
Net income	$	288,000

The following balance sheet information also is available:

	12/31/18			12/31/17
Cash	$	491,000		$	86,000
Accounts receivable		152,000			116,000
Accounts payable (operating expenses)		102,000			76,000
Income taxes payable		26,000			47,000

In addition, the following transactions took place during the year:

Common stock was issued for $132,000 in cash.

Long-term investments were sold for $66,000 in cash. The original cost of the investments also was $66,000.

$96,000 in cash dividends was paid to shareholders.

The company has no outstanding debt, other than those payables listed above.

Operating expenses include $46,000 in depreciation expense.

Required:
1. Prepare a statement of cash flows for 2018 for the Diversified Portfolio Corporation. Use the direct method for reporting operating activities.
2. Prepare the cash flows from operating activities section of Diversified’s 2018 statement of cash flows using the indirect method.

Answer 1

SOLUTION

1. Direct Method

Diversified Portfolio Corporation

Statement of cash flows

For the Year Ended December 31, 2018

Particulars	Amount ($)	Amount ($)
Cash flows from operating activities:
Collections from customers (1)	1,184,000
Payment of operating expenses (2)	(788,000)
Payment of income taxes (3)	(93,000)
Net cash flows from operating activities (A)		303,000
Cash flows from investing activities:
Sale of investments	66,000
Net cash flows from investing activities (B)		66,000
Cash flows from financing activities:
Proceeds from issue of ordinary shares	132,000
Payment of dividends	(96,000)
Net cash flows from financing activities (C)		36,000
Increase in cash (A+B+C)		405,000
Cash and cash equivalents, January 1		86,000
Cash and cash equivalents, December 31		491,000

(1) $1,220,000 in service revenue less $36,000 ($152,000 - $116,000) increase in accounts receivable.

(2) $860,000 in operating expenses less $46,000 in depreciation less $26,000 ($102,000 - $76,000) increase in accounts payable.

(3) $72,000 in income tax expense plus $21,000 ($47,000 - $26,000) decrease in income taxes payable.

2. Indirect Method-

Diversified Portfolio Corporation

Statement of cash flows

For the Year Ended December 31, 2018

Particulars	Amount ($)	Amount ($)
Cash flows from operating activities:
Net Income	288,000
Adjustments for noncash effects:
Depreciation expense	46,000
Changes in operating assets and liabilities:
Increase in accounts receivable ($152,000 - $116,000)	(36,000)
Increase in accounts payable ($102,000 - $76,000)	26,000
Decrease in income taxes payable ($47,000 - $26,000)	(21,000)
Net cash flows from operating activities (A)		303,000
Cash flows from investing activities:
Sale of investments	66,000
Net cash flows from investing activities (B)		66,000
Cash flows from financing activities:
Proceeds from issue of ordinary shares	132,000
Payment of dividends	(96,000)
Net cash flows from financing activities (C)		36,000
Increase in cash (A+B+C)		405,000
Cash and cash equivalents, January 1		86,000
Cash and cash equivalents, December 31		491,000