Question

Consider the following Balance Sheet
	2013	2014
Cash	$34,000.00	$34,500.00
Accounts receivable, net	$12,000.00	$17,000.00
Inventory	$16,000.00	$14,000.00
Investment (long-term)	$6,000.00	-
Fixed assets	$80,000.00	$93,000.00
Accumulated depreciation	$-48,000.00	$-39,000.00
Total Assets	$100,000.00	$119,500.00
Accounts Payable	$19,000.00	$12,000.00
Bonds payable	$10,000.00	$30,000.00
Common stock	$50,000.00	$61,000.00
Retained Earnings	$21,000.00	$28,000.00
Treasury Stock	-	$-11,500.00
Total Liabilities and Equity	$100,000.00	$119,500.00

Supplemental information for time period January 1, 2014 through December 31, 2014:

• Net income, $7,000
• Sales on account, $70,000.
• Purchases on account, $40,000.
• Depreciation, $5,000.
• Expenses paid in cash, $18,000 (including $4,000 of interest and $6,000 in taxes).
• Decrease in inventory value, $2,000.
• Sales of fixed assets for $6,000 cash; cost $21,000 and twothirds depreciated (loss or gain is included in income)
• Purchase of fixed assets for cash, $4,000.
• Acquisition of fixed assets by issue of bonds $30,000 (noncash activity)
• Sale of investments (longterm) for $9,000 cash.
• Purchase of treasury stock for cash, $11,500.
• Retire bonds payable by issuing common stock, i.e. conversion of bonds into common stock, $10,000 (noncash activity)
• Collections on accounts receivable, $65,000.
• Sold unissued common stock for cash, $1,000.

1. Prepare a statement of cash flows using the indirect method for the year ended December 31, 2014. (First need to create an income statement. net income should be $7,000).
2. Prepare a side-by-side comparative statement contrasting net income and cash flows from operations (direct method) and explain which of these two financial reports better reflects profitability.

Answer 1