Question

The Diversified Portfolio Corporation provides investment advice to customers. A condensed income statement for the year ended December 31, 2021, appears below:

Service revenue	$	1,020,000
Operating expenses		760,000
Income before income taxes		260,000
Income tax expense		65,000
Net income	$	195,000

The following balance sheet information also is available:

	12/31/2021			12/31/2020
Cash	$	368,000		$	76,000
Accounts receivable		132,000			106,000
Accrued liabilities (for operating expenses)		82,000			66,000
Income taxes payable		16,000			27,000

In addition, the following transactions took place during the year:

1. Common stock was issued for $112,000 in cash.
2. Long-term investments were sold for $56,000 in cash. The original cost of the investments also was $56,000.
3. $86,000 in cash dividends was paid to shareholders.
4. The company has no outstanding debt, other than those payables listed above.
5. Operating expenses include $36,000 in depreciation expense.

Required:
1. Figure a statement of cash flows for 2021 for the Diversified Portfolio Corporation. Use the direct method for reporting operating activities.
2. Figure the cash flows from operating activities section of Diversified’s 2021 statement of cash flows using the indirect method.

• Required 1

Figure a statement of cash flows for 2021 for the Diversified Portfolio Corporation. Use the direct method for reporting operating activities. (Amounts to be deducted should be indicated with a minus sign.)

DIVERSIFIED PORTFOLIO CORPORATION Statement of Cash Flows For the Year Ended December 31, 2021 Cash flows from operating activities: Net cash flows from operating activities $0 Cash flows from investing activities: Net cash flows from investing activities 0 Cash flows from financing activities: Net cash flows from financing activities 0 Increase in cash 0 Cash and cash equivalents, January 1 Cash and cash equivalents, December 31 $0

• Required 2

Figure the cash flows from operating activities section of Diversified’s 2021 statement of cash flows using the indirect method. (Amounts to be deducted should be indicated with a minus sign.)

	DIVERSIFIED PORTFOLIO CORPORATION Statement of Cash Flows (Partial) For the Year Ended December 31, 2021 Cash flows from operating activities: Adjustments for noncash effects: Changes in operating assets and liabilities: Net cash flows from operating activities $0

Answer 1

a)

*Cash Received from Customers = 1020000 - 26000 = 994000

*Cash payment for operating expenses = 760000 - 16000 - 36000 = 708000

*Cash payment for Income tax = 65000 + 11000 = 76000

b)