Question

A comparative balance sheet for Lomax Company containing data for the last two years is as follows:

Lomax Company Comparative Balance Sheet
	This Year			Last Year
Assets
Current assets:
Cash and cash equivalents	$	61,000		$	40,000
Accounts receivable		710,000			530,000
Inventory		848,000			860,000
Prepaid expenses		10,000			5,000
Total current assets		1,629,000			1,435,000
Property, plant, and equipment		3,170,000			2,600,000
Less accumulated depreciation		810,000			755,000
Net property, plant, and equipment		2,360,000			1,845,000
Long-term investments		60,000			110,000
Loans to subsidiaries		214,000			170,000
Total assets	$	4,263,000		$	3,560,000
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	970,000		$	670,000
Accrued liabilities		65,000			82,000
Income taxes payable		95,000			80,000
Total current liabilities		1,130,000			832,000
Bonds payable		820,000			600,000
Total liabilities		1,950,000			1,432,000
Stockholders’ equity:
Common stock		1,740,000			1,650,000
Retained earnings		573,000			478,000
Total stockholders’ equity		2,313,000			2,128,000
Total liabilities and stockholders' equity	$	4,263,000		$	3,560,000

The following additional information is available about the company’s activities during this year:

1. The company declared and paid a cash dividend this year.

2. Bonds with a principal balance of $350,000 were repaid during this year.

3. Equipment was sold during this year for $70,000. The equipment had cost $130,000 and had $40,000 in accumulated depreciation on the date of sale.

4. Long-term investments were sold during the year for $110,000. These investments had cost $50,000 when purchased several years ago.

5. The subsidiaries did not repay any outstanding loans during the year.

6. Lomax did not repurchase any of its own stock during the year.

The company reported net income this year as follows:

Sales					$	2,000,000
Cost of goods sold						1,300,000
Gross margin						700,000
Selling and administrative expenses						490,000
Net operating income						210,000
Nonoperating items:
Gain on sale of investments	$	60,000
Loss on sale of equipment		(20,000	)			40,000
Income before taxes						250,000
Income taxes						80,000
Net income					$	170,000

Required:

Using the indirect method, prepare a statement of cash flows for this year. (List any deduction in cash and cash outflows as negative amounts.)

Answer 1

Answer -

Lomax Company
Statement of Cash Flows
Operating activities:
Net income		$170,000
Adjustments to convert net income to cash basis:
Gain on sale of investment	($60,000)
Loss on sale of equipment	$20,000
Depreciation expense	$95,000
Increase in accounts receivable	($180,000)
Decrease in inventory	$12,000
Increase in prepaid expenses	($5,000)
Increase in accounts payable	$300,000
Decrease in accrued liabilities	($17,000)
Increase in income taxes payable	$15,000
		$180,000
Net cash provided by operating activities		$350,000
Investing activities:
Proceeds from sale of equipment	$70,000
Proceeds from sale of long-term investments	$110,000
Loan to subsidiaries	($44,000)
Purchase of property, plant and equipment	($700,000)
Net cash used by investing activities		($564,000)
Financing activities:
Issuance of bonds payable	$570,000
Issuance of common stock	$90,000
Retirement of bonds payable	($350,000)
Payment cash dividends	($75,000)
Net cash provided by financing activities		$235,000
Net increase in cash and cash equivalents		$21,000
Beginning cash and cash equivalents		$40,000
Ending cash and cash equivalents		$61,000

Calculation:

1. Depreciation expense:

= (Current year accumulated depreciation - Previous year accumulated depreciation) + Accumulated depreciation on equipment sold

= ($810000 - $755000) + $40000

= $95000

2. Increase in accounts receivable:

= Current year accounts receivable - Previous year accounts receivable

= $710000 - $530000

= $180000

3. Decrease in inventory:

= Previous year inventory - Current year inventory

= $860000 - $848000

= $12000

4. Increase in prepaid expenses:

= Current year prepaid expenses - Previous year prepaid expenses

= $10000 - $5000

= $5000

5. Increase in accounts payable:

= Current year accounts payable - Previous year accounts payable

= $970000 - $670000

= $300000

6. Decrease in accrued liabilities:

= Previous year accrued liabilities - Current year accrued liabilities

= $82000 - $65000

= $17000

7. Increase in income taxes payable:

= Current year income taxes payable - Previous year income taxes payable

= $95000 - $80000

= $15000

8. Loan to subsidiaries:

= Current year loan to subsidiaries - Previous year loan to subsidiaries

= $214000 - $170000

= $44000

9. Purchase of property, plant and equipment:

= (Current year property, plant and equipment - Previous year property, plant and equipment) + Cost of equipment sold

= ($3170000 - $2600000) + $130000

= $700000

10. Issuance of bonds payable:

= (Current year bonds payable - Previous year bonds payable) + Payment of bonds payable

= ($820000 - $600000) + $350000

= $570000

11. Issuance of common stock:

= Current year common stock - Previous year common stock

= $1740000 - $1650000

= $90000

12. Payment cash dividends

= Previous year retained earnings + Net income - Current year retained earnings

= $478000 + $170000 - $573000

= $75000

13. Net increase in cash and cash equivalents:

= Net cash provided by operating activities - Net cash used by investing activities + Net cash provided by financing activities

= $350000 - $564000 + $235000

= $21000