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 .......................................$ 900,000
Operating expenses ..................................700,000
Income before income taxes ...................200,000
Income tax expense ....................................50,000
Net income ..............................................$ 150,000

The following balance sheet
 information also is available:

In addition, the following transactions took place during the year:
1. Common stock was issued for $100,000 in cash.
2. Long-term investments were sold for $50,000 in cash. The original cost of the investments also was $50,000.
3. $80,000 in cash dividends was paid to shareholders.
4. The company has no outstanding debt, other than those payables listed above.
5. Operating expenses include $30,000 in depreciation expense.

 

Required:
1. Prepare a statement of cash flows for 2021 for the Diversified Portfolio Corporation. Use the direct method for reporting operating activities. Use a format similar to the one in the Concept Review Exercise at the end of Part B of this chapter.
2. Prepare the cash flows from operating activities section of Diversified’s 2021 statement of cash flows using the indirect method. Use a format similar to the one in the Concept Review Exercise at the end of Part B of this chapter.

Answer 1

DIVERSIFIED PORTFOLIO CORPORATION

          Statement of Cash Flows

For the Year Ended December 31, 2021

Cash flows from operating activities:

          Cash received from customers (1)               $880,000

          Cash paid for operating expenses (2)          (660,000)

          Cash paid for income taxes (3)                       (55,000)

           Net cash flows from operating activities                     $165,000

 

Cash flows from investing activities:

          Sale of investments                                       50,000

           Net cash flows from investing activities                  50,000

 

Cash flows from financing activities:

          Issuance of common stock                            100,000

          Dividends paid to shareholders                    (80,000)

           Net cash flows from financing activities                        20,000

Increase in cash                                                                           235,000

Cash and cash equivalents, January 1                                        70,000

Cash and cash equivalents, December 31                             $305,000

 

(1) $900,000 in service revenue less $20,000 increase in accounts receivable.

 

(2) $700,000 in operating expenses less $30,000 in depreciation less $10,000 increase in accounts payable.

 

(3) $50,000 in income tax expense plus $5,000 decrease in income taxes payable.

 

2.

DIVERSIFIED PORTFOLIO CORPORATION

          Statement of Cash Flows

For the Year Ended December 31, 2021

Cash flows from operating activities:

          Net income                                                   $150,000

          Adjustments for noncash effects:

           Depreciation expense                                    30,000

          Changes in operating assets and liabilities:

           Increase in accounts receivable                  (20,000)

           Increase in accrued liabilities                        10,000

           Decrease in income taxes payable                (5,000)

           Net cash flows from operating activities                  $165,000

    Net cash flows from operating activities                  $165,000