Question

The comparative balance sheets for Cullumber Corporation show the following information.

		December 31
		2020		2019
Cash		$33,600		$12,900
Accounts receivable		12,300		10,100
Inventory		12,200		8,900
Available-for-sale debt investments		–0–		3,000
Buildings		–0–		29,600
Equipment		45,200		19,900
Patents		5,100		6,200
		$108,400		$90,600
Allowance for doubtful accounts		$2,900		$4,400
Accumulated depreciation—equipment		2,000		4,500
Accumulated depreciation—building		–0–		6,100
Accounts payable		5,100		3,000
Dividends payable		–0–		4,900
Notes payable, short-term (nontrade)		2,900		4,000
Long-term notes payable		31,000		25,000
Common stock		43,000		33,000
Retained earnings		21,500		5,700
		$108,400		$90,600

Additional data related to 2020 are as follows.

1.		Equipment that had cost $11,100 and was 40% depreciated at time of disposal was sold for $2,500.
2.		$10,000 of the long-term note payable was paid by issuing common stock.
3.		Cash dividends paid were $4,900.
4.		On January 1, 2020, the building was completely destroyed by a flood. Insurance proceeds on the building were $30,100 (net of $2,000 taxes).
5.		Debt investments (available-for-sale) were sold at $1,700 above their cost. The company has made similar sales and investments in the past.
6.		Cash was paid for the acquisition of equipment.
7.		A long-term note for $16,000 was issued for the acquisition of equipment.
8.		Interest of $2,000 and income taxes of $6,400 were paid in cash.

Prepare a statement of cash flows using the indirect method.

Answer 1

Cash flow statement (Indirect method)

Particulars	Amount ($)	Amount ($)
Cash flow from operating activities
Net income (Working Note-1)		15800
Adjustments to reconcile net income to
Net cash provided by operating activities
Depreciation expense (Working note - 2)	1940
Loss on sale of equipment (Working note-3)	4160
Gain from flood damage (Working Note-4)	-8600
Patent amortization ($6200 - $5100)	1100
Gain on sale of investment	-1700
Increase in Accounts receivable (Working note-5)	-3700
Increase in inventory ($8900 - $12200)	-3300
Increase in accounts payable ($3000 - $5100)	2100
		-8000
Net cash provided by operating activities		7800
Cash flow from investing activities
Sale of investment ($3000 + $1700)	4700
Sale of equipment	2500
Purchase of equipment (Working Note-6)	-20400
Proceeds from flood damage to building ($30100 + $2000)	32100
Net cash provided by investing activities		18900
Cash flow from Financing activities
Payment of short term notes payable ($4000 - $2900)	-1100
Payment of dividend	-4900
Net cash used by financing activities		-6000
Net increase in cash		20700
Cash, January 1, 2020		12900
Cashm December 31, 2020		33600

Working NotesL
1) Net income = ($21500 ending retained earnings - $5700 beginning retained earnings) = $15800
2) Depreciation expense = [($11100 cost of equipment X 40%) - Difference in accumulated depreciation ($4500 - $2000) = $1940
3) Loss on sale of equipment = [($11100 - 40%) - $2500 sale value] = $4160
4) Gain from flood damage = [$29600 cost of building - $6100 depreciation - Gross insurance proceeds ($30100 + $2000)] = $8600
5) Increase in accounts receivable = [($12300 - $2900 allwance for doubtful debts) closing - ($10100 - $4400 allowance for doubtful debts) opening] = $3700
6) Purchase of Equipment = [$19900 opening + $16000 long term note - $2500 sale - $4160 loss - ($11100 - 40%) depreciation - $45200 closing] = $20400

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