Question

6. The balance sheet and income statement for Hours Gone Inc. are presented below. Prepare the cash flow statements under both the indirect and direct methods for 2019.

Hours Gone Inc.
Balance sheet
	2019	2018
Cash	7,500,000	6,300,000
Accounts receivable	4,560,000	4,400,000
allowance for doubtful accounts	(135,000)	(125,000)
Inventory	2,400,000	2,375,000
Supplies	48,000	52,000
Prepaid insurance	45,000	65,000
Investments, fair value method	1,200,000	1,100,000
Investments, equity method	2,400,000	2,200,000
Property, plant & equipment	5,150,000	4,150,000
Accumulated depreciation	(510,000)	(450,000)
Total Assets	22,658,000	20,067,000
Accounts payable	3,750,000	3,522,000
Accrued liabilities	125,000	145,000
Income tax payable	150,000	50,000
Notes payable, long-term	1,450,000	1,250,000
Bonds payable	4,500,000	5,000,000
Common stock	500,000	400,000
Additional paid in capital	4,500,000	3,600,000
Additional paid in capital - stock options	150,000	100,000
Retained Earnings	7,533,000	6,000,000
Total liabilities and stockholders' equity	22,658,000	20,067,000

Hours Gone Inc.
Income statement
Sales revenue	22,520,000
Cost of goods sold	12,500,000
Gross profit	10,020,000
S&A expenses	6,000,000
Pre-tax operating income	4,020,000
Investment gains, unrealized	200,000
Investment income, equity method	300,000
Other income and gains	500,000
Loss on sale of equipment	(45,000)
Total other expenses and losses	(45,000)
Pre-tax income	4,475,000
Income tax	895,000
Net income	3,580,000
Other information:
Hours Gone Inc. paid dividends during the year
Hours Gone sold equipment with an original cost of $100,000 and accumulated depreciation of $50,000 for $5,000
Hours Gone issued $1,000,000 in common stock for equipment
The company also purchased equipment for cash.
The company had stock option expense of $50,000 during the year

Answer 1

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Workings- Indirect Method	Amount $
Depreciation expense
Closing- Accumulated depreciation	510,000.00
Add: Accumulated depreciation on assets sold	50,000.00
Opening- Accumulated depreciation	450,000.00
Depreciation expense	110,000.00
Increase in Accounts receivable
Closing Balance, net	4,425,000.00
Less: Opening Balance, net	4,275,000.00
Increase in Accounts receivable	150,000.00
Increase in Inventory
Closing Balance	2,400,000.00
Less: Opening Balance	2,375,000.00
Increase in Inventory	25,000.00
Decrease in Supplies
Closing Balance	48,000.00
Less: Opening Balance	52,000.00
Decrease in Supplies	(4,000.00)
Decrease in Prepaid insurance
Closing Balance	45,000.00
Less: Opening Balance	65,000.00
Decrease in Prepaid insurance	(20,000.00)
Increase in Accounts Payable
Closing Balance	3,750,000.00
Less: Opening Balance	3,522,000.00
Increase in Accounts Payable	228,000.00
Decrease in Accrued liabilities
Closing Balance	125,000.00
Less: Opening Balance	145,000.00
Decrease in Accrued liabilities	(20,000.00)
Increase in Tax Payable
Closing Balance	150,000.00
Less: Opening Balance	50,000.00
Increase in Tax Payable	100,000.00
Property, plant & equipment purchased in cash
Closing Balance	5,150,000.00
Add: Sold during the year	100,000.00
Less: Opening Balance	4,150,000.00
Less: Property, plant & equipment purchased against Equity	1,000,000.00
Property, plant & equipment purchased in cash	100,000.00
Notes payable, long-term taken
Closing Balance	1,450,000.00
Less: Opening Balance	1,250,000.00
Notes payable, long-term taken	200,000.00
Bonds payable redeemed
Opening Balance	5,000,000.00
Less: Closing Balance	4,500,000.00
Bonds payable redeemed	500,000.00
Common stock issued
Closing Balance- Common stock	500,000.00
Closing Balance- Additional paid in capital	4,500,000.00
Closing Balance- Additional paid in capital- stock options	150,000.00
Less: Closing Balance- Common stock	400,000.00
Less: Closing Balance- Additional paid in capital	3,600,000.00
Less: Closing Balance- Additional paid in capital- stock options	100,000.00
Common stock issued	1,050,000.00
Dividends paid
Closing- Retained Earnings	7,533,000.00
Add: Net Income	3,580,000.00
Opening- Retained Earnings	6,000,000.00
Dividends paid	3,347,000.00

Hours Gone Inc.
Cashflow statement	Amount $	Amount $
Particulars
Net Income		3,580,000.00
Adjustment to reconcile Net Income to Net Cash
Add:
Deprecation Expense	110,000.00
Loss on sale of equipment	45,000.00	155,000.00
Less:
Investment gains, unrealized		-
Cash flow from Operations		3,735,000.00
Changes in Current Assets/Current Liabilities
Increase in Accounts receivable	(150,000.00)
Increase in Inventory	(25,000.00)
Decrease in Supplies	4,000.00
Decrease in Prepaid insurance	20,000.00
Increase in Accounts Payable	228,000.00
Decrease in Accrued liabilities	(20,000.00)
Increase in Tax Payable	100,000.00	157,000.00
Net cash provided by operating activities		3,892,000.00
Cash flow from investing activities
Equipment sold	5,000.00
Property, plant & equipment purchased in cash	(100,000.00)
Net cash used by investing activities		(95,000.00)
Cash flow from financing activities
Notes payable, long-term taken	200,000.00
Bonds payable redeemed	(500,000.00)
Common stock issued	1,050,000.00
Dividends paid	(3,347,000.00)
Net cash used for financing activities		(2,597,000.00)
Net Increase/(Decrease) in cash		1,200,000.00
Cash Balance, beginning		6,300,000.00
Cash Balance, ending		7,500,000.00