Question

The following is a partial balance sheet for Douglas Inc. for 20x5 and 20x6: 20x6 20x5 Cash $ 99,000 $ 51,000 Receivables 53,000 39,000 Inventory 101,000 118,000 Prepaid expenses 6,000 9,000 Property, Plant and Equipment (PPE) 420,000 350,000 Accumulated depreciation (110,000) (125,000) Accounts payable $ 51,000 $ 56,000 Retained earnings 43,000 22,000 Additional Information – 1. The Accumulated Depreciation account has been credited for the depreciation expense for the period. The depreciation expense amounted to $25,000 and is included in operating expenses. One asset was disposed of during the year. The original cost of the asset sold was $100,000. The asset had a net book value of $60,000 on the date of sale. 2. The Retained Earnings account has been charged for dividends and credited for the net income for the year. The income statement for 20x6 is as follows: Sales (all on credit) $660,000 Cost of goods sold 363,000 Gross profit 297,000 Operating expenses 177,000 Operating income 120,000 Loss on sale of PPE 12,000 Interest expense 8,000 Net income before taxes 100,000 Income tax expense 45,000 Net income $ 55,000 Required – Calculate the following sections of the statement of cash flow: (a) Cash flow from operations using indirect method. (b) Cash flow from investing

Answer 1

Answer-a)-

DOUGLAS INC.
STATEMENT OF CASH FLOWS PARTIAL (USING INDIRECT METHOD)
FOR THE YEAR ENDED 31 DECEMBER,20X6
Particulars		Amount
		$
Cash flow from operating activities
Net Income		55000
Adjustments to reconcile net income to net cash provided by operating activities
Adjustment for non cash effects
Depreciation		25000
Loss on sale of PPE		12000
Change in operating assets & liabilities
Increase in accounts receivable	($53000-39000)	-14000
Decrease in inventory	($101000-$118000)	17000
Decrease in prepaid expenses	($6000-9000)	3000
Decrease in accounts payable	($51000-$56000)	-5000
Net cash flow from operating activities		93000

b)-

DOUGLAS INC.
STATEMENT OF CASH FLOWS PARTIAL (USING INDIRECT METHOD)
FOR THE YEAR ENDED 31 DECEMBER,20X6
Particulars		Amount
		$

Cash Flow from Investing activities
New property,plant & equipment purchased		-170000
Old PPE sold	($60000-$12000)	48000
Net cash Flow from Investing activities (b)		-122000

Explanation- New plant asset purchased = Closing balance of plant asset+ Cost of plant asset sold- Opening balance of plant assets

= $420000+$100000-$350000

= $170000

Sale value of plant asset = Book value of plant asset at the time of sale- Loss on disposal of plant asset

= $60000-$12000

= $48000