Question

32. The comparative balance sheet for 2019 and 2018 for Jackson Corporation as well as additional     

      information concerning transactions and events during 2019 are presented below:      

Jackson Corporation

Balance Sheet

December 31, 2019 and 2018

                                                                                                              

                                                                                                                   2019                   2018  

         Cash                                                                                              $ 35,900            $ 10,200

         Accounts receivable (net)                                                                 48,300                20,300

         Inventory                                                                                           35,000                42,000

         Long-term investments                                                                              0                15,000

         Property, plant & equipment                                                          236,500              150,000

         Accumulated depreciation                                                               (37,700)              (25,000)

                                                                                                               $318,000            $212,500

         Accounts payable                                                                          $ 19,000            $ 26,500

         Accrued liabilities                                                                             19,000                17,000

         Long-term notes payable                                                                  70,000                50,000

         Common stock                                                                                130,000                90,000

         Retained earnings                                                                            80,000                29,000

                                                                                                               $318,000            $212,500

      Additional data:

      (a) Net income for the year 2019 was $90,000.

      (b) Depreciation on plant assets for the year was $12,700.

      (c) Sold the long-term investments for $33,000 (at a gain of $18,000).

    (d) Paid dividends of $39,000.

      (e) Purchased machinery costing $26,500 and paid cash.

     

      Required:

      Using the indirect method, prepare a statement of cash flows for 2019 for Jackson Corporation.

Answer 1

In calculating the cash flows statement from indirect method, we will start with the net income. We will add back the non cash item of depreciation & deduct gain on sale of long term investment in it. Then we will adjust the amount for increase or decrease in cash due to increase or decrease in current assets or current liabilities.Like, an increase in current assets will reduce cash, so we will deduct it and a decrease in current assets will increase cash, so we will add it. Similarly, an increase in current liabilities will increase cash, so it will be added and a decrease in current liabilities will reduce cash, so it will be deducted. Before proceeding with the cash flow statement, we will check for certain adjustments given as below:

(1) Purchase of property, plant & equipment:

Ending property plant & equipment: $236500

Less: Beginning property, plant & equipment: ($150000)

Property, plant & equipment purchased : $86500

Total property plant & equipment purchased is for $86500. Out of which $26500 is purchased by cash. The remaining amount of $60000 is purchased by issue of common stock and long term notes payable. The difference between the ending & beginning book values of common stock and long term notes payable is the amount for purchase.

Issue of common stock = $130000 - $90000 = $40000

Issue of long term notes payable = $70000 - $50000 = $20000

Total issued against purchase = $60000

Statement of cash flows for the year ending 2019 is given below:

Description	Amount	Amount
Operating activities:
Net income	90000
Adjustments to reconcile net income
Add: Depreciation	12700
Less: Gain on sale of investments	(18000)
Less: Increase in accounts receivable	(28000)
Add: Decrease in inventory	7000
Less: Decrease in accounts payable	(7500)
Add: Increase in accrued liabilities	2000
Cash flows from operating activities		58200
Investing activities:
Proceeds from sale of long term investments	33000
Cash paid for machinery purchase	(26500)
Cash flows from investing activities		6500
Financing activities:
Dividends paid	(39000)
Cash flows from financing activities		(39000)
Net increase in cash		25700
Beginning cash balance		10200
Ending cash balance		35900