Question

Miracle Tool, Inc., sells a single product (a combination screwdriver, pliers, hammer, and crescent wrench) exclusively through television advertising. The comparative income statements and balance sheets are for the past two years.

Additional Information

The following information regarding the company’s operations in 2018 is available from the company’s accounting records.

Early in the year, the company declared and paid a $4,000 cash dividend.

During the year, marketable securities costing $15,000 were sold for $14,000 cash, resulting in a $1,000 nonoperating loss.

The company purchased plant assets for $20,000, paying $2,000 in cash and issuing a note payable for the $18,000 balance.

During the year, the company repaid a $10,000 note payable, but incurred an additional $18,000 in long-term debt as described in Transaction 3.

The owners invested $15,000 cash in the business as a condition of the new loans described in Transaction 4.

MIRACLE TOOL, INC.
COMPARATIVE INCOME STATEMENT
FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2018
	2017				2018
Sales	$	500,000			$	350,000
Less: Cost of goods sold		200,000				140,000
Gross profit on sales	$	300,000			$	210,000
Less: Operating expenses (including depreciation of $34,000 in 2017 and $35,000 in 2018)		260,000				243,000
Loss on sale of marketable securities		–0–				1,000
Net income (loss)	$	40,000			$	(34,000	)

MIRACLE TOOL, INC. COMPARATIVE BALANCE SHEETS
	December 31,
	2017				2018
Assets
Cash and cash equivalents	$	10,000			$	60,000
Marketable securities		20,000				5,000
Accounts receivable		40,000				23,000
Inventory		120,000				122,000
Plant and equipment (net of accumulated depreciation)		300,000				285,000
Totals	$	490,000			$	495,000
Liabilities & Stockholders' Equity
Accounts payable	$	50,000			$	73,000
Accrued expenses payable		17,000				14,000
Note payable		245,000				253,000
Capital stock (no par value)		120,000				135,000
Retained earnings		58,000				20,000
Totals	$	490,000			$	495,000

Required:

a. Prepare a worksheet for a statement of cash flows.

b. Prepare a statement of cash flows for 2018 by the indirect method.

Answer 1

Answer a.
Miracle Tool Inc.
Worksheet for Statement of Cash Flows
For the Year Ended Dec 31, 2018
Balance Sheet Effects	Dec 31, 2017	Dr. Changes	Cr. Changes	Dec 31, 2018
Assets
Cash & Cash Equivalents	10,000.00	50,000.00		60,000.00
Marketable Securities	20,000.00		15,000.00	5,000.00
Accounts Receivable	40,000.00		17,000.00	23,000.00
Inventory	120,000.00	2,000.00		122,000.00
Plant & Equipment	300,000.00	20,000.00	35,000.00	285,000.00
Totals	490,000.00			495,000.00
Liabilities:
Accounts Payable	50,000.00		23,000.00	73,000.00
Accrued Expenses Payable	17,000.00	3,000.00		14,000.00
Notes Payable	245,000.00	10,000.00	18,000.00	253,000.00
Capital Stock	120,000.00		15,000.00	135,000.00
Retained Earnings	58,000.00	38,000.00		20,000.00
Totals	490,000.00	123,000.00	123,000.00	495,000.00
Cash Effects:	Sources	Uses
Operating Activities:
Net Loss		34,000.00
Depreciation	35,000.00
Loss on sale of Marketable Securities	1,000.00
Decrease in Accounts Receivable	17,000.00
Increase in Inventory		2,000.00
Increase in Account Payable	23,000.00
Decrease in Accrued Expenses Payable		3,000.00
Investing Activities:
Proceeds from Marketable Securities	14,000.00
Purchase of Plant Assets		2,000.00
Financing Activities:
Dividend Paid		4,000.00
Repayment of Notes Payable		10,000.00
Increase in Capital Stock	15,000.00
Sub-Total	105,000.00	55,000.00
Net Increase / decrease		50,000.00
Total	105,000.00	105,000.00
Answer 2.
MIRACLE TOOLS INC
Statement of Cash Flows (Indirect Method)
For the Year ended Dec 31, 2018
Cash Flow from opearating activities:
Net Loss		(34,000.00)
Add/(Less) non cash effects on operating activities
Depreciation expense	35,000.00
Loss on sale of Marketable Securities	1,000.00
Decrease in Accounts Receivable	17,000.00
Increase in Inventory	(2,000.00)
Increase in Account Payable	23,000.00
Decrease in Accrued Expenses Payable	(3,000.00)	71,000.00
Net Cash provided by operating activities		37,000.00
Cash flow from Investing Activities
Proceeds from Marketable Securities	14,000.00
Purchase of Plant Assets	(2,000.00)
Cash Flow / (used) from Investing activities		12,000.00
Cash Flow from Financing Activities
Cash paid to Notes Payable	(10,000.00)
Issue of Capital Stock	15,000.00
Cash dividend paid	(4,000.00)
Cash Flow from Financing Activities		1,000.00
Net Increase / (Decrease) in Cash		50,000.00
Cash balance at the beginning - Dec 31, 2017		10,000.00
Cash balance at the end - Dec 31, 2018		60,000.00