Question

Joyner Company’s income statement for Year 2 follows: Joyner Company’s Income Statement Sales $ 797,000 Cost of goods sold 411,000 Gross margin 386,000 Selling and administrative expenses 217,000 Net operating income 169,000 Nonoperating items: Gain on sale of equipment 6,000 Income before taxes 175,000 Income taxes 70,000 Net income $ 105,000 Its balance sheet amounts at the end of Years 1 and 2 are as follows: Joyner Company's Balance Sheet Year 2 Year 1 Assets Cash $ 195,300 $ 191,500 Accounts receivable 258,000 149,000 Inventory 320,000 276,000 Prepaid expenses 10,000 20,000 Total current assets 783,300 636,500 Property, plant, and equipment 475,000 366,000 Less accumulated depreciation 166,500 131,400 Net property, plant, and equipment 308,500 234,600 Loan to Hymans Company 48,000 0 Total assets $ 1,139,800 $ 871,100 Liabilities and Stockholders' Equity Accounts payable 316,000 259,000 Accrued liabilities 49,000 55,000 Income taxes payable 84,600 80,100 Total current liabilities 449,600 394,100 Bonds payable 191,000 107,000 Total liabilities 640,600 501,100 Common stock 333,000 278,000 Retained earnings 166,200 92,000 Total stockholders' equity 499,200 370,000 Total liabilities and stockholders' equity $ 1,139,800 $ 871,100 Equipment that had cost $31,700 and on which there was accumulated depreciation of $10,000 was sold during Year 2 for $27,700. The company declared and paid a cash dividend during Year 2. It did not retire any bonds or repurchase any of its own stock. Sam Conway, president of the company, considers $199,300 to be the minimum cash balance for operating purposes. As can be seen from the balance sheet data, only $195,300 in cash was available at the end of the current year. The sharp decline is puzzling to Mr. Conway, particularly because sales and profits are at a record high. Required: 1. Using the direct method, adjust the company’s income statement to a cash basis for Year 2. 2. Using the data from (1) above and other data from the problem as needed, prepare a statement of cash flows for Year 2.

Answer 1

Adjust Company Income Statement to Cash Basis :-

Cash collect from Customer :-
Sales	797000
(-) Increase A/c Receivable	109000	688000
Less:-Cash Paid to Supplier :-
COGS	411000
(-) Increase A/c Payable	57000
(+) Increase Inventory	44000	(398000)
Less :- Selling & Adm Exp		(217000)
Less :- Income Tax Paid :-
Income Tax	70000
(-) Increase Income tax Payable	4500	(65500)
Adjustments:-
Add:- Decrease Prepaid Exp		10000
Less:- Decrease Accrued Liab		(6000)
Add:- Depreciation (166500-131400+10000)		45100
Total		56600

Statement of Cash Flow :-

Cash Flow From Operating Activities:-
Cash collect from Customer	688000
Cash Paid to Supplier	-398000
Selling & Adm Exp	-217000
Income Tax Paid	-65500
Adjustments :-
Depreciation	45100
Decrease Prepaid Exp	10000
Decrease Accrued Liab	-6000
Cash Flow From Operating Activities (A)	56600	56600
Cash Flow From Investing Activities:-
Sold Equipment	27700
Purchase Equipment (475000 – 366000 + 31700)	-140700
Loan to Hymans Co.	-48000
Cash Flow From Investing Activities (B)	-161000	-161000
Cash Flow From Financing Activities:-
Issue Bond Payable	84000
Issue Common Stock	55000
Dividend Paid (92000 + 105000 – 166200)	-30800
Cash Flow From Financing Activities (C)	108200	108200
Net Cash Flow (A+B+C)		3800
Add:- Beginning Cash Balance		191500
Ending Cash Balance		195300