Question

39. Sweet Company’s outstanding stock consists of 1,000 shares of cumulative 5% preferred stock with a $100 par value and 10,000 shares of common stock with a $10 par value. During the first three years of operation, the corporation declared and paid the following total cash dividends.

	Dividends Declared & Paid
Year 1	$	2,000
Year 2	$	6,000
Year 3	$	32,000

The amount of dividends paid to preferred and common shareholders in year 3 is:

• $7,000 preferred; $25,000 common.

• $15,000 preferred; $17,000 common.

• $5,000 preferred; $27,000 common.

• $32,000 preferred; $0 common.

• $0 preferred; $32,000 common.

42. In preparing a company's statement of cash flows using the indirect method, the following information is available:

Net income	$	52,000
Accounts payable decreased by		18,000
Accounts receivable increased by		25,000
Inventories increased by		5,000
Depreciation expense		30,000

Net cash provided by operating activities was:

• $70,000.

• $52,000.

• $80,000.

• $60,000.

• $34,000.

Answer 1

Question 39

The Preference Stock is Cumulative. Hence, the dividend not paid in an year is to be paid in subsequent years, before the payment of dividend to Common Stock holders.

Number of Preference Stock = 1000

Face Value per preference stock = 100

The value of preference stock = 100,000

The Dividend Payable to Preference Stock = 5%

The dividend payable for preference stock holders p.a. = Number of Shares * Face Value * Dividend Rate =  1,000*100*5%

= 100,000 * 5%

= $ 5,000

Dividends Paid to Preference Stock Holders

Year 1 = 2,000

Year 2 = 6,000

Total Dividends paid in year 1 & 2 = 8,000

Total Dividend payable for Year 1 & 2 = 5,000+5,000 = 10,000

Dividend for the previous years (1&2) to be paid in Year 3 = 10,000 - 8,000

= 2,000

Dividend Payable for the year 3 = 5,000

Hence, Total Dividend Payable to Preference Stock holders in Year 3 = 2,000+5,000 = $ 7,000

Year 3

Total Dividends Paid = 32,000

Total Dividends paid to common stock holders = Total Dividends Paid - Dividend to Preference Stock Holders

= 32,000 - 7000

= $ 25,000

Hence, Dividend Paid to Preference Stock holders in year 3 = 7,000

COmmon Stock holders dividend = 25,000

Question 42

Net Income 52,000

Add: Depreciation (Non Cash Expense to be added Back) 30,000

Less: Decrease in Accounts Payable   18,000

Less: Increase in Accounts Receivables 25,000

Less: Increase in Inventory 5,000

Total Cash Inflow from Operating Activities $ 34,000

Decrease in Operating Liabilities leads to Cash Outflow. Hence, reduced from Net Income

Increase in Operating Assets leads to Cash Outflow, hence reduced from Net Income.