In: Accounting
What about the direct method for this problem? chapter 23 problem 1PSA
Required information
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 | $ | 49,800 | $ | 73,500 | |||
Accounts receivable | 65,810 | 50,625 | |||||
Inventory | 275,656 | 251,800 | |||||
Prepaid expenses | 1,250 | 1,875 | |||||
Total current assets | 392,516 | 377,800 | |||||
Equipment | 157,500 | 108,000 | |||||
Accum. depreciation—Equipment | (36,625 | ) | (46,000 | ) | |||
Total assets | $ | 513,391 | $ | 439,800 | |||
Liabilities and Equity | |||||||
Accounts payable | $ | 53,141 | $ | 114,675 | |||
Short-term notes payable | 10,000 | 6,000 | |||||
Total current liabilities | 63,141 | 120,675 | |||||
Long-term notes payable | 65,000 | 48,750 | |||||
Total liabilities | 128,141 | 169,425 | |||||
Equity | |||||||
Common stock, $5 par value | 162,750 | 150,250 | |||||
Paid-in capital in excess of par, common stock | 37,500 | 0 | |||||
Retained earnings | 185,000 | 120,125 | |||||
Total liabilities and equity | $ | 513,391 | $ | 439,800 | |||
FORTEN COMPANY Income Statement For Year Ended December 31, 2017 |
||||||
Sales | $ | 582,500 | ||||
Cost of goods sold | 285,000 | |||||
Gross profit | 297,500 | |||||
Operating expenses | ||||||
Depreciation expense | $ | 20,750 | ||||
Other expenses | 132,400 | 153,150 | ||||
Other gains (losses) | ||||||
Loss on sale of equipment | (5,125 | ) | ||||
Income before taxes | 139,225 | |||||
Income taxes expense | 24,250 | |||||
Net income | $ | 114,975 | ||||
Additional Information on Year 2017 Transactions
The loss on the cash sale of equipment was $5,125 (details in b).
Sold equipment costing $46,875, with accumulated depreciation of $30,125, for $11,625 cash.
Purchased equipment costing $96,375 by paying $30,000 cash and signing a long-term note payable for the balance.
Borrowed $4,000 cash by signing a short-term note payable.
Paid $50,125 cash to reduce the long-term notes payable.
Issued 2,500 shares of common stock for $20 cash per share.
Declared and paid cash dividends of $50,100.
Required:
Prepare a complete statement of cash flows; report its operating
activities according to the direct method.
(Amounts to be deducted should be indicated with a minus
sign.)
FORTEN COMPANY |
||
Cash flow Statement for the year ended 31st December 2017 |
||
Cash flows from Operating Activities |
||
Cash receipts from Customers |
$ 567,315.00 |
|
Cash payments: |
||
Cash paid to accounts payables/suppliers |
$ (370,390.00) |
|
For operating expenses |
$ (131,775.00) |
|
For Income tax |
$ (24,250.00) |
|
$ (526,415.00) |
||
A.Net Cash provided by operating activities |
$ 40,900.00 |
|
Cash flows from Investing activities |
||
Sale of Equipment |
$ 11,625.00 |
|
Purchase of Equipment |
$ (30,000.00) |
|
B.Net cash used by investing activities |
$ (18,375.00) |
|
Cash flows from Financing activities |
||
Proceeds from issue of Shares |
$ 50,000.00 |
|
Payment od Dividend |
$ (50,100.00) |
|
Payment for notes payable-long term |
$ (50,125.00) |
|
Proceeds from Notes Payable issue |
$ 4,000.00 |
|
C. Net cash Used in financing activities |
$ (46,225.00) |
|
(A+B+C) Net increase (Decrease) in cash |
$ (23,700.00) |
|
Add: Beginning cash Balance |
$ 73,500.00 |
|
Ending Cash Balance |
$ 49,800.00 |
Actual payment made for equipment purchase will be shown in Investing activities that is $30000.
Working 1) Cash paid to Suppliers |
|
Cost of goods sold |
$ 285,000.00 |
Add -Increase in Inventory |
$ 23,856.00 |
Purchases |
$ 308,856.00 |
Add - Decrease in accounts Payable |
$ 61,534.00 |
Amount paid to supplier |
$ 370,390.00 |
Working 2) Cash paid for Operating Activities |
|
Total Operating Expenses |
$ 132,400.00 |
Less -Decrease in Prepaid Expenses |
$ 625.00 |
Cash paid for Operating Activities |
$ 131,775.00 |
Working 3) Cash Received from Customers |
|
Sales Revenue |
$ 582,500.00 |
Less: Increase in Accounts Receivable |
$ 15,185.00 |
Cash Received from Customers |
$ 567,315.00 |