Question

FORTEN COMPANY Comparative Balance Sheets December 31
	Current Year						Prior Year
Assets
Cash		$	78,400					$	92,500
Accounts receivable			94,460						69,625
Inventory			304,156						270,800
Prepaid expenses			1,400						2,275
Total current assets			478,416						435,200
Equipment			138,500						127,000
Accum. depreciation—Equipment			(46,125	)					(55,500	)
Total assets		$	570,791					$	506,700
Liabilities and Equity
Accounts payable		$	72,141					$	143,175
Short-term notes payable			15,700						9,800
Total current liabilities			87,841						152,975
Long-term notes payable			55,500						67,750
Total liabilities			143,341						220,725
Equity
Common stock, $5 par value			191,250						169,250
Paid-in capital in excess of par, common stock			66,000						0
Retained earnings			170,200						116,725
Total liabilities and equity		$	570,791					$	506,700

  

FORTEN COMPANY Income Statement For Current Year Ended December 31
Sales				$	677,500
Cost of goods sold					304,000
Gross profit					373,500
Operating expenses
Depreciation expense	$	39,750
Other expenses		151,400			191,150
Other gains (losses)
Loss on sale of equipment					(24,125	)
Income before taxes					158,225
Income taxes expense					50,850
Net income				$	107,375

Additional Information on Current Year Transactions

1. The loss on the cash sale of equipment was $24,125 (details in b).
2. Sold equipment costing $103,875, with accumulated depreciation of $49,125, for $30,625 cash.
3. Purchased equipment costing $115,375 by paying $68,000 cash and signing a long-term note payable for the balance.
4. Borrowed $5,900 cash by signing a short-term note payable.
5. Paid $59,625 cash to reduce the long-term notes payable.
6. Issued 4,400 shares of common stock for $20 cash per share.
7. Declared and paid cash dividends of $53,900.

Required:
1. Prepare a complete statement of cash flows using the indirect method for the current year. (Amounts to be deducted should be indicated with a minus sign.)

Answer 1

Solution

FORTEN COMPANY

Statement of Cash Flow(Indirect Method)

For the year ended December 31

Cash Flows from operating activities	Amount( $)	Amount( $)
Net Income		1,07,375
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation Expense (Note 3)	39,750
Loss on Disposal of Equipment (Note 1 )	24,125
Changes in Current Assets and current Liabilities:
Increase in Accounts Receivable($94,460-$69,625)	-24,835
Increase in Inventory($304,156-$270,800)	-33,356
Decrease in Prepaid expenses($2,275-$1,400)	875
Decrease in Accounts Payable($143,175-$72,141)	-71,034
Total Adjustments		-64,475
Net Cash Provided by operating activities (A)		42,900
Cash Flow from Investing Activities
Cash Payment to Purchase Equipment (Notes 4)	-68,000
Sale of existing equipment (Note 2)	30,625
Net Cash flow from investing activities (B)		-37,375
Cash flow from financing activities
Borrowed Cash by signing a short term notes payable	5,900
Long term notes payable paid	-59,625
Proceeds from Issue of Common stock(4,400 X $20).	88,000
Dividend Paid (Note 5)	-53,900
Net Cash flow from financing activities (C )		-19,625
Net Increase in cash during the year =(A+B+C)		-14,100
Opening cash balance		92,500
Closing cash balance December 31		78,400
Non Cash Investing & Financing Activities
Purchased Equipment for $115,375 by paying cash $68,000 and signing long term notes payable		$47,375

Notes:

1. Loss on disposal of equipment is a added back to net profit, because it is a non cash item

2.Sale of equipment results in cash inflow, hence added to investing activity.

3. Depreciation on equipment is a added back to net profit, because it is a non cash item.

4.Equipment is purchased by issuing Long term notes and by payment of cash. Only Payment element is shown as outflow in investing activity.

5.Dividend paid is a financing activity.

6.General rule, Increase in assets is outflow and decrease in assets is inflow.

7.General rule, Increase in Liabilities is inflow and decrease in liabilities is outflow.

8.No separate breakup is given for Par value and paid in excess of par, common stock.Total proceeds are shown together. Proceeds to Par value will be $22,000 (4,400 X5/ share) and Proceed in Par value in excess of Par, common stock is $66,000 (4,400 X15/ share).

Please free to ask for any clarifications.