Question

The following information and financial statements excerpts pertain to Liquidity, Inc.

All short term investments (securities available for sale) were purchased on 12/31/18 and sold during 2019.

The company entered a lease agreement on 12/31/19.

Fixed assets with a net book value of $15 were sold during the year.

The company repaid the current portion of long-term debt during the year.

Dividend was declared and partially paid.

	2018				2019
Assets
Cash		54				45
Short term investments		95				0
Accounts receivable		45				85
Inventory		52				75
Prepaid general expenses		11				15
Fixed assets under capital lease, net		0				50
Fixed assets, net		165				228
		422				498
Liabilities and stockowners’ equity
Accounts payable		38				48
Wages payable		12				6
Tax payable		3				5
Dividend payable		0				4
Current portion of long term debt		10				12
Obligations under capital leases		0				50
Long term debt		183				180
Common stock		150				163
Retained earnings		26				30
		422				498

	2018				2019
Revenues, net						426
Cost of goods sold						310
Gross margin						116
General expenses		30
Wages expenses		42
Depreciation expense		24
Interest expense		11
Loss on sale of fixed assets		3
Gain on sale of securities available for sale		(12	)
Tax expenses		8				106
Net income						10

Required (Please answer the following questions):

-Prepare the statement of cash flows for the year 2019 using the direct method.

-Reconcile net income and net cash flows from operating activities for the year 2019.

Answer 1

Cash flow from Operating Activities :-
Cash collection from customers	386
Cash Paid to Supplier	-323
General Exp Paid (30 + 4 {increase prepaid general exp})	-34
Wages (42 + 6 {decrease wages payable})	-48
Interest Exp paid	-11
Tax Expense paid (8 – 2 {increase income tax payable}	-6
Cash flow from Operating Activities (A)	-36	-36
Cash flow from Investing Activities :-
Sale of Fixed asset (15 – 3)	12
Fixed asset purchase	-102
AFS securities sold (95 + 12)	107
Cash flow from Investing Activities (B)	17	17
Cash flow from Financing Activities :-
Current portion of long term dept repaid	-10
Current portion of long term dept Issue	12
Long Term Dept repay	-3
Common stock issue	13
Dividend Paid	-2
Cash flow from Financing Activities (C)	10	10
Net Cash flow (A+B+C)		-9
Beginning cash Balance		54
Ending Cash Balance		45

Cash collection from Customers:-

Revenue	426
(-) Increase A/c receivable	40
Cash collection from Customers	386

Cash Paid to Supplier:-

COGS	310
(-) Increase A/c Payable	10
(+) Increase Inventory	23
Cash Paid to Supplier	323

Fixed Asset Purchase:-

Beginning balance of Net fixed asset	165
(-) Net Book value of asset sold	15
(-) Depreciation on asset	24
(-) Ending balance of Net fixed asset	228
Fixed Asset Purchase	102

Dividend Paid :-

Retained Earning Beginning Balance	26
(+) Net Income	10
Retained Earning Ending Balance	30
(-) Increase in dividend payable	4
Dividend Paid	2

(2) Reconcile net income and net cash flows from operating activities for the year 2019 :-

Net Income	10
(+) Depreciation charges	24
(-) Gain on sale of AFS securities	-12
(+) Loss on sale of fixed asset	3
(-) Increase A/c Receivable	-40
(-) Increase Inventory	-23
(-) Increase Prepaid general exp	-4
(+) Increase A/c Payable	10
(-) Decrease wages payable	-6
(+) Increase tax payable	2
Cash flow from operating activities	-36