Question

Forten Company, a merchandiser, recently completed its calendar-year 2017 operations. For the year, (1) all sales are credit sales, (2) all credits to Accounts Receivable reflect cash receipts from customers, (3) all purchases of inventory are on credit, (4) all debits to Accounts Payable reflect cash payments for inventory, and (5) Other Expenses are paid in advance and are initially debited to Prepaid Expenses. The company’s income statement and balance sheets follow.

FORTEN COMPANY
Comparative Balance Sheets
December 31, 2017 and 2016

	2017	2016
	Assets
Cash	$54,400	$76,500
Accounts receivable	70,310	53,625
Inventory	280,156	254,800
Prepaid expenses	1,280	2,005
Total current assets	406,146	386,930
Equipment	154,500	111,000
Accum. depreciation—Equipment	(38,125)	(47,500)
Total assets	$522,521	$450,430
Liabilities and Equity
Accounts payable	$56,141	$119,175
Short-term notes payable	10,900	6,600
Total current liabilities	67,041	125,775
Long-term notes payable	63,500	51,750
Total liabilities	130,541	177,525
Equity
Common stock, $5 par value	168,750	153,250
Paid-in capital in excess of par, common stock	40,500	0
Retained earnings	182,730	119,655
Total liabilities and equity	$522,521	$450,430

  

FORTEN COMPANY
Income Statement
For Year Ended December 31, 2017

Sales		$597,500
Cost of goods sold		288,000
Gross profit		309,500
Operating expenses
Depreciation expense	$23,750
Other expenses	135,400	159,150
Other gains (losses)
Loss on sale of equipment		(8,125)
Income before taxes		142,225
Income taxes expense		28,450
Net income		$113,775

Additional Information on Year 2017 Transactions

The loss on the cash sale of equipment was $8,125 (details in b).

Sold equipment costing $55,875, with accumulated depreciation of $33,125, for $14,625 cash.

Purchased equipment costing $99,375 by paying $36,000 cash and signing a long-term note payable for the balance.

Borrowed $4,300 cash by signing a short-term note payable.

Paid $51,625 cash to reduce the long-term notes payable.

Issued 2,800 shares of common stock for $20 cash per share.

Declared and paid cash dividends of $50,700.

Required:
1. Prepare a complete statement of cash flows; report its operating activities using the indirect method.

Answer 1

FORTEN COMPANY
Statement of Cash Flows
For Year Ended December 31, 2017
Cash flows from operating activities
Net Income	$113,775
Adjustments to reconcile net income to net cash provided by operations:
Depreciation expense	23,750
Accounts receivable increase	-16,685
Inventory increase	-25,356
Prepaid expense decrease	725
Accounts payable decrease	-63,034
Loss on disposal of equipment	8,125
Net cash provided by operating activities		41300
Cash flows from investing activities
Cash paid for equipment	-36,000
Cash received from sale of equipment	14,625
Net cash used in investing activities		-21375
Cash flows from financing activities:
Cash borrowed on short-term note	4,300
Cash paid on long-term note	-51,625
Cash received from issuing stock	56,000
Cash paid for dividends	-50,700
Net cash used in financing activities		-42,025
Net increase (decrease) in cash		-22,100
Cash balance at beginning of year		76,500
Cash balance at end of year		54,400