Question

P23.7  

(LO 2, 3, 4 ) (SCF—Direct and Indirect Methods from Comparative Financial Statements) Chapman Company, a major retailer of bicycles and accessories, operates several stores and is a publicly traded company. The comparative balance sheet and income statement for Chapman as of May 31, 2020, are as follows. The company is preparing its statement of cash flows.

Chapman Company Comparative Balance Sheet As of May 31
	2020	2019
Current assets
Cash	$ 28,250	$ 20,000
Accounts receivable	75,000	58,000
Inventory	220,000	250,000
Prepaid expenses	9,000	7,000
Total current assets	332,250	335,000
Plant assets
Plant assets	600,000	502,000
Less: Accumulated depreciation—plant assets	150,000	125,000
Net plant assets	450,000	377,000
Total assets	$782,250	$712,000
Current liabilities
Accounts payable	$123,000	$115,000
Salaries and wages payable	47,250	72,000
Interest payable	27,000	25,000
Total current liabilities	197,250	212,000
Long-term debt
Bonds payable	70,000	100,000
Total liabilities	267,250	312,000
Stockholders' equity
Common stock, $10 par	370,000	280,000
Retained earnings	145,000	120,000
Total stockholders' equity	515,000	400,000
Total liabilities and stockholders' equity	$782,250	$712,000

Chapman Company Income Statement For the Year Ended May 31, 2020
Sales revenue	$1,255,250
Cost of goods sold	722,000
Gross profit	533,250
Expenses
Salaries and wages expense	252,100
Interest expense	75,000
Depreciation expense	25,000
Other expenses	8,150
Total expenses	360,250
Operating income	173,000
Income tax expense	43,000
Net income	$  130,000

The following is additional information concerning Chapman's transactions during the year ended May 31, 2020.

• 1.All sales during the year were made on account.
• 2.All merchandise was purchased on account, comprising the total accounts payable account.
• 3.Plant assets costing $98,000 were purchased by paying $28,000 in cash and issuing 7,000 shares of stock.
• 4.The “other expenses” are related to prepaid items.
• 5.All income taxes incurred during the year were paid during the year.
• 6.In order to supplement its cash, Chapman issued 2,000 shares of common stock at par value.
• 7.Cash dividends of $105,000 were declared and paid at the end of the fiscal year.

Instructions

a.  

Compare and contrast the direct method and the indirect method for reporting cash flows from operating activities.

c.  

Using the indirect method, calculate only the net cash flow from operating activities for Chapman Company for the year ended May 31, 2020.

Please help with A & C

Answer 1