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Statement of Cash Flows—Indirect Method Glendive Corp. is in the process of preparing its statement of...

Statement of Cash Flows—Indirect Method

Glendive Corp. is in the process of preparing its statement of cash flows for the year ended June 30, 2017. An income statement for the year and comparative balance sheets are as follows:

For the Year Ended
June 30, 2017
Sales revenue $550,000
Cost of goods sold 350,000
    Gross profit $200,000
General and administrative expenses $55,000
Depreciation expense 75,000
Loss on sale of plant assets 5,000
    Total expenses and losses $135,000
Income before interest and taxes $65,000
Interest expense 15,000
    Income before taxes $50,000
Income tax expense 17,000
    Net income $33,000
June 30
2017 2016
Cash $31,000 $40,000
Accounts receivable 90,000 75,000
Inventory 80,000 95,000
Prepaid rent 12,000 16,000
   Total current assets $213,000 $226,000
Land $250,000 $170,000
Plant and equipment 750,000 600,000
Accumulated depreciation (310,000) (250,000)
   Total long-term assets $690,000 $520,000
   Total assets $903,000 $746,000
Accounts payable $155,000 $148,000
Other accrued liabilities 32,000 26,000
Income taxes payable 8,000 10,000
   Total current liabilities $195,000 $184,000
Long-term bank loan payable $100,000 $130,000
Common stock $350,000 $200,000
Retained earnings 258,000 232,000
  Total stockholders' equity $608,000 $432,000
  Total liabilities and stockholders' equity $903,000 $746,000

Dividends of $7,000 were declared and paid during the year. New plant assets were purchased during the year for $195,000 in cash. Also, land was purchased for cash. Plant assets were sold during the year for $25,000 in cash. The original cost of the assets sold was $45,000, and their book value was $30,000. Additional stock was issued for cash, and a portion of the bank loan was repaid.

Required:

1. Prepare a statement of cash flows for 2017 using the indirect method in the Operating Activities section. Use the minus sign to indicate cash payments, cash outflows, or decreases in cash.

Glendive Corp.
Statement of Cash Flows
For the Year Ended June 30, 2017
Cash Flows from Operating Activities
Net income $
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense
Loss on sale of plant assets
Increase in accounts receivable
Decrease in inventory
Decrease in prepaid rent
Increase in accounts payable
Increase in other accrued liabilities
Decrease in income taxes payable
Net cash provided by operating activities $
Cash Flows from Investing Activities
Sale of plant assets $
Acquisition of land
Acquisition of new plant assets
Net cash used by investing activities $
Cash Flows from Financing Activities
Repayment of long-term loan $
Issuance of additional stock
Payment of cash dividends
Net cash provided by financing activities $
Net decrease in cash $
Cash balance, June 30, 2016
Cash balance, June 30, 2017 $

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The indirect method involves reporting net cash flow from operating activities; it is computed by adjusting net income to remove the effect of all deferrals of past operating cash receipts and payments and all accruals of future operating cash receipts and payments. The sum of operating, investing, and financing activities must equal the net change in cash.

2. Cash flow from operations computed under the direct method is
preferred by investors as it provides more information by showing actual inflows and outflows of cash.

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Correct

Feedback

Partially correct

Solutions

Expert Solution

Solution 1:

Statement of Cash Flows - Glendive Corporation
For the year ended Jun 30, 2017
Particulars Details Amount
Cash Flow from Operating Activities:
Net Income $33,000.00
Adjustments to reconcile net income to cash flow from operating activities:
Depreciation Expense $75,000.00
Loss on sale of plant assets $5,000.00
Increase in Accounts Receivables ($90,000 - $75,000) -$15,000.00
Decrease in Inventory ($95,000 - $80,000) $15,000.00
Decrease in prepaid rent ($16,000 - $12,000) $4,000.00
Increase in Accounts payable ($155,000 - $148,000) $7,000.00
Increase in other accrued liabilities ($32,000 - $26,000) $6,000.00
Decrease in income taxes payable ($10,000 - $8,000) -$2,000.00
Total Adjustments $95,000.00
Net Cash Flow From Operating Activites (A) $128,000.00
Cash Flow from Investing Activities:
Sale of plant assets $25,000.00
Acquisiton of new plant assets -$195,000.00
Cash paid for purchase of land -$80,000.00
Net Cash used by Investing Activites (B) -$250,000.00
Cash Flow from Financing Activities:
Repayment of long term loan -$30,000.00
Issuance of additional stock $150,000.00
Payment of cash dividends -$7,000.00
Net Cash provided by Financing Activites (C) $113,000.00
Total Cash flow from all activities (A+B+C) -$9,000.00
Cash at the beginning of the year $40,000.00
Cash at the end of year $31,000.00

Solution 2:

Glendive Corporation
Statement of Cash Flows (Partial) (Direct Method)
For Year Ended June 30, 2017
Particulars Details Amount
Cash Flows from operating activities:
Cash received from customers $535,000.00
Less: Cash disbursement:
Cash paid to supplier for inventory -$328,000.00
Cash paid for operating expenses -$45,000.00
Cash paid for interest -$15,000.00
Cash Paid for income taxes -$19,000.00 -$407,000.00
Net Cash provided by operating activities $128,000.00
Computation of cash received from customers
Particulars Amount
Beginning accounts receivables $75,000.00
Add: Sales $550,000.00
Less: Ending accounts receivables $90,000.00
Cash received from customers $535,000.00
Computation of cash paid for inventory
Particulars Amount
Cost of Goods Sold $350,000.00
Add: Ending inventory $80,000.00
Less: Beginning inventory $95,000.00
Purchases made during the year $335,000.00
Add: Opening accounts payable $148,000.00
Less: Ending accounts payable $155,000.00
Cash paid to supplier for inventory $328,000.00
Computation of cash paid for General and administrative expenses
Particulars Amount
Operating expenses $55,000.00
Add: Ending Prepaid expense $12,000.00
Less: Beginning prepaid expense $16,000.00
Add: Beginning other accrued liabilities $26,000.00
Less: Ending other accrued liabilities $32,000.00
Cash paid for General and administrative expenses $45,000.00
Computation of cash paid for Income Tax
Particulars Amount
Income tax expense $17,000.00
Add: Beginning income tax Payable $10,000.00
Less: Ending income tax payable $8,000.00
Cash paid for income tax $19,000.00

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