Question

Waterways prepared the balance sheet and income statement for the irrigation installation division for last year. Now the company needs to prepare a cash flow statement for the same division. The comparative balance sheets for Waterways Corporation’s Irrigation Installation Division for last year and the prior year and the income statement for last year are presented below. (Note: Work in Process is a current asset and should be treated as any other current asset.)

Additional information:

1. Waterways sold a piece of company equipment for $30,000. The equipment had been used for six years. It had cost $100,000 when purchases and had a 10-years life and a $10,000 salvage value. Straight-line depreciation was used.

2. Waterways purchased new equipment costing $200,000.

3. The division paid $100,000 in dividends.

Waterways Corporation - Installation Division
Income Statement
For the Year Ending December 31, Last Year
Sales			$5,536,077
Less: Cost of goods sold			3,132,777
Gross Profit			2,403,300
Operating expenses:
Advertising		$52,000
Insurance		382,000
Salaries and wages		594,650
Depreciation		72,500
Other operating expenses		30,500
Total operating expenses			1,131,650
Income from operations			1,271,650
Other income
Loss on sale of equip		(16,000)
Other expenses
Interest expense		(12,200)
Net other income and expenses			(28,200)
Income before income tax			1,243,450
Income tax expenses			373,035
Net income			$870,415

Waterways Corporation - Installation Division
Balance Sheet
December 31
Assets			Last Year	Prior Year
Current assets
Cash			$792,306	$746,681
Accounts receivable			680,750	542,685
Work in process			680,450	0
Inventory			16,750	7,500
Prepaid expenses			71,500	42,590
Total current assets			2,241,756	1,339,456
Property, plant, and equipment
Furnishings			40,416	40,416
Equipment			900,200	800,200
Buildings			450,000	450,000
Land			300,000	300,000
Accumulated depreciation			(503,704)	(485,204)
Total property, plant, and      equipment			1,186,912	1,105,412
Total Assets			$3,428,668	$2,444,868
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable			$156,300	$128,360
Income taxes payable			100,344	79,989
Wages payable			600	1,984
Interest payable			1,200	0
Other current liabilities			14,520	15,246
Revolving bank loan payable			16,000	0
Total current liabilities			288,964	225,579
Long-term liabilities
Notes payable			150,000	0
Total liabilities			438,964	225,579
Stockholders' equity
Common stock			1,250,000	1,250,000
Retained earnings			1,739,704	969,289
Total stockholders' equity			2,989,704	2,219,289
Total liabilities and stockholders' equity			$3,428,668	$2,444,868

Instructions:

For last year:

a. Prepare a statement of cash flow using the indirect method.

b. Determine free cash flow.

Answer 1

1		Statement of cashflows
	Cashflow from operating activities:
	Net income				870415
	Adjustments:
	Loss on disposal of equipment				16000
	Depreciation expense				72500
	Increase in accounts receivable
	(680750-542685)				-138065
	Increase in work in process
	(680450-0)				-680450
	Increase in inventory (16750-7500)				-9250
	Increase in prepaid expenses
	(71500-42590)				-28910
	Increase in accounts payable
	(156300-128360)				27940
	Increase in income taxes payable
	(100344-79989)				20355
	Decrease In Wages payable
	(1984-600)				-1384
	Increase in interest payable
	(1200-0)				1200
	Decrease in other current liabilities
	(15246-14520)				-726
	Increase in revolving bank loan payable
	(16000-0)				16000
	Cashflow from operating activities (A)				165625
	Cashflow from investing activities:
	Sale of equipment				30000
	Purchase of equipment				-200000
	Cashflow from investing activities (B)				-170000
	Cashflow from financing activities:
	Issued notes payable (150000-0)				150000
	Dividend paid				-100000
	Cashflow from financing activities ©				50000
	Net increase in cash (A)+(B)+©				45625
	Add:Beginning balance of cash				746681
	Ending balance of cash				792306
2	Free cashflow=Cashflow from operating activities-Capital expenditures
	Cashflow from operating activities=$ 165625
	Capital expenditure=Ending balance pf property,Plant and equipment-Beginning balance of property,Plant and Equipment+Depreciation=1186912-1105412+72500=$ 154000
	Free cashflow=165625-154000=$ 11625