Question

The following income statement and balance sheet information are available for two firms, Firm A and Firm B.

(a) Calculate the amount of dividends Firm A and Firm B paid using the information given.

(b) Prepare statement of cash flows for each firm using the indirect method.

(c) Analyze the difference in the two firms,

Income Statement for Year Ended Decemeber 31,2015

                                                   Firm A       Firm B

Sales                                       1,000,000       1,000,000

Cost of Goods Sold                     700,000           700,000

Gross Profit                                300,000            300,000

Other Expenses

Selling and Admin.                      120,000             115,000

Depreciation                                 10,000                30,000

Interest Expense                            20,000               5,000

Earnings before taxes                   150,000              150,000

Income tax expense                        75,000               75,000

Net income                                      75,000               75,000

Changes in Balance Sheet Accounts December 31,2014, to Decemebr 31,2015

                                                      Firm A               Firm B

Cash and Cash Equivalents                   0                     +10,000

Accounts receivable                        +40,000                 +5,000

Inventory                                        +40,000                 -10,000

Property, plant, and equipment         +20,000                +70,000

Less accumulated depreciation        (+10,000)              (+30,000)

Total Assets                                    +90,000               +45,000

Accounts payable                             -20,000               -5,000

Notes payable                                   +17,000              +2,000

Long-term debt                                 +20,000                -10,000

Deferred taxes                                  +3,000                  +18,000

Retained earnings                             +70,000                 +40,000

Total Liabilities and Equity                 +90,000                  +45,000

Please answer part C) as I have already figured out the first two portions. I'm just struggling with how to analyze the cash flow statement.

Answer 1

Solution:

(A ) -Calculation of amount of Dividend:

*Firm(A):

                           Increase in Retained earnings = 70,000

                           Net Income =7 5,000

                           Therefore Dividend paid by firm A = $5,000

*Firm(B):

                          Retained earnings                             =40,000

                          Net Income =75,000

                          Therefore Dividend Paid by Firm B = $35,000

(B) -