Question

Mastery Problem: Statement of Cash Flows

Championship Boxing, Inc.

Championship Boxing, Inc. is a small manufacturer of cardboard boxes of all sizes. You have reported for your first day of work, and the company is in an uproar. Yearly financial statements are being prepared, but a computer malfunction of the company’s new BOX-9000 computer has inadvertently erased parts of the company’s balance sheet, along with almost all related data except the company’s statement of cash flows. The IT department is working to retrieve earlier backups, but estimates that the reconstruction of the data will take about 24 hours.

Unfortunately, financial statements are to be presented at a stockholders’ meeting in one hour. The company uses the indirect method to prepare its statement of cash flows (rather than the direct method), so your new supervisor believes the missing data for the balance sheet can be prepared using the statement of cash flows. You are assigned this task, since you were top student in your business school class. Meanwhile, the supervisor will go to the stockholders’ meeting and give some introductory remarks.

In addition to the statement of cash flows, the following data survived the computer mishap:

The investments were sold for $280,000 cash.

Equipment was acquired for $152,000 cash.

Land was acquired for $326,000 cash.

There were no disposals of equipment during the year.

12,500 shares of common stock were sold for cash during the year.

There was a $96,000 debit to Retained Earnings for cash dividends declared.

Statement of Cash Flows

Your supervisor has provided you with the following statement of cash flows, prepared using the indirect method. Recall that the statement of cash flows consists of three sections: cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities. Review the statement, and then proceed to the next panel.

Championship Boxing, Inc.
Statement of Cash Flows
For the Year Ended December 31, 20Y8

Cash flows from (used for) operating activities:    

  Net income$186,540    

  Adjustments to reconcile net income to net cash flow from operating activities:    

    Depreciation18,400    

    Gain on sale of investments(50,000)   

Changes in current operating assets and liabilities:    

  Increase in accounts receivable(25,390)   

  Increase in inventories(33,450)   

  Increase in accounts payable41,100    

  Decrease in accrued expenses payable(12,470)   

      Net cash flow from operating activities  $124,730  

Cash flows from (used for) investing activities:    

  Cash received from sale of investments$280,000    

  Cash paid for purchase of land(326,000)   

  Cash paid for purchase of equipment(152,000)   

      Net cash flow used for investing activities  (198,000)

Cash flows from (used for) financing activities:    

  Cash received from sale of common stock$187,500    

  Cash paid for dividends(91,200)   

      Net cash flow from financing activities  96,300  

Net increase in cash  $23,030  

Cash balance, January 1, 20Y8  585,920  

Cash balance, December 31, 20Y8  $608,950  

Balance Sheet

Using the information on above, complete the following comparative balance sheet.

Championship Boxing, Inc.
Comparative Balance Sheet
December 31, 20Y8 and 20Y7

20Y820Y7

Assets      

Cash $  $585,920

Accounts receivable (net) 230,970   

Inventories   618,320

Investments 0   

Land   0

Equipment 705,120   

Accumulated depreciation-equipment (166,400)   

Total assets $  $

       

Liabilities      

Accounts payable (merchandise creditors) $  $391,830

Accrued expenses payable (operating expenses) 41,160   

Dividends payable   19,200

Total liabilities $498,090  $

       

Stockholders' Equity      

Common stock, $4 par $  $100,000

Paid-in capital in excess of par   280,000

Retained earnings    

Total stockholders' equity $1,858,320  $

Total liabilities and stockholders' equity $  $

Check My Work

Answer 1

Prepare a comparative balance sheet as shown below:

Thus, the total of balance sheet for December 31, 2016 is $ 2,356,380 and for

December 31. 2015 is $ 2,044,940

Note-1:

Calculate the accounts receivable (net) for December 31, 2015 as shown below:

Accounts receivable (net) = (Balance as on December 31, 2016 - Increase in accounts receivable) = $ 230,950 - $ 25)70 = $205,580

Note-2:

Calculate the inventories for December 31, 2015 as shown below:

Inventories = (Balance as on December 21, 2015) + Increase in inventories

= $ 618,320 + $ 33,450 = $ 651,770

Note-3:

Calculate the investments for December 31, 2015 as shown below:

Investments = Cash received on sale of investments - Gain on sale of investments

= $ 280,000 - $ 50,000 = $ 230,000

Note-4:

Calculate the equipment for December 31, 2015 as shown below:

Equipment = Balance as on December 31, 2016 - New equipment purchase cost

= $ 705,120 - $ 152,000 = $ 553,120

Note-5:

Calculate the accumulated depreciation for December 31, 2015 as shown below:

Accumulated depreciation – equipment

= Balance as on December 31, 2016) – ((Depreciation for the year 2016)

= $ 166,400 - $ 18,400

= $148,000

Note-6:

Calculate the accounts payable (merchandise creditors) for December 31, 2016 as shown below:

Accounts payable (merchandise inventory) = (Balance as on December 31, 2015) + (increase in accounts payable) = $ 391,830 + $ 41,070 = $ 432,900

Note-7:

Calculate the accrued expenses payable (operating expenses) for December 31, 2015 as shown below:

Accrued expenses payable

= (Balance as on Decrease 31, 2016) + (Decrease in accrued expenses payable

= $ 41,150 + $ 12,470 = $ 53,620

Note-8-

Calculate the dividends payable for December 31, 2016 as shown below:

Note-9:

Calculate the common stock for December 31. 2016 as shown below:

Common stock = Balance as on December 31, 2015 Shares issued

= $ 100000 + (12,500 shares x $ 4 par value)

= $ 100,000 + $ 50,000 = $ 150,000

Note-10:

Calculate the paid-in capital for December 31, 2016 as shown below:

Note-11:

Calculate the retained earnings for December 31, 2015 as shown below: