Question

F. Prepare a statement of cash flow on both direct and indirect method
		2017	2016	Change
Assets:
Cash		215,000	70,000	145,000
Accounts receivable, net		87,000	65,000	22,000
Inventory		74,000	60,000	14,000
Prepaid expenses		12,000	20,000	-8,000
Property, palnt & equipment		780,000	600,000	180,000
Accumulated depreciation		-110,000	-60,000	-50,000
Total Assets		1,058,000	755,000	303,000
Liabilities & Equity
Accounts payable		32,000	40,000	-8,000
Accrued liabilities		26,000	40,000	-14,000
Taxes payable		15,000	4,000	11,000
Long-term Notes Payable		100,000	-
Common stock		200,000	200,000
Additional paid in capital		326,000	276,000	50,000
Retained earnings		359,000	195,000	164,000
Total liabilities and equity		1,058,000	755,000	303,000
Sales		1,400,000
Cost of goods sold		780,000
Gross profit		620,000
Operating exoenses		290,000
Pre-tax income		330,000
Income taxes		66,000
Net income		264,000
a. Stock option expense of $50,000 was recognized in 2017
b. Equipment of $180,000 was purchased using $100,000 note payable and cash

Answer 1

Solution:  

Cash Flow Statement (Direct Method)

Particulars		Amount($)
A.CASH FLOW FROM OPERATING ACTIVITIES
Cash received from customers (WN 1)		1,378,000
Cash payments to suppliers (WN 2)		(794,000)
Cash payments for operating expenses (WN 3)		(204,000)
Cash payment for income tax expense (WN 4)		(55,000)
Net cash provided by operating activities		325,000
B.CASH FLOW FROM INVESTING ACTIVITIES
Purchase of equipment for cash (WN 5)	(80,000)
Net cash used in investing activities		( 80,000)
C.CASH FLOW FROM FINANCING ACTIVITIES
Additional paid in capital	50,000
Payment of dividend (WN 6)	(100,000)
Stock option expense	(50,000)
Net cash used in financing activities		(100,000)
Net Increase in cash (A + B+ C)		145,000
Add: Cash at the beginning (or 2016)		70,000
Cash at the end (or 2017)		215,000

Cash Flow Statement (Indirect Method)

Particulars	Amount($)	Amount($)
A.CASH FLOW FROM OPERATING ACTIVITIES
Net Income		264,000
Adjustments to reconcile net income
Add: Depreciation expense ($ 110,000 - $ 60,000)	50,000
Add: Stock option expense	50,000
Add: Prepaid expenses written off	8,000
Add: Increase in taxes payable	11,000
Less: Increase in accounts receivable	(22,000)
Less: Increase in inventory	(14,000)
Less: Decrease in accounts payable	(8,000)
Less: Decrease in accrued liabilities	(14,000)
Net cash provided by operating activities		325,000
B.CASH FLOW FROM INVESTING ACTIVITIES
Purchase of equipment for cash (WN 5)	(80,000)
Net cash used in investing activities		( 80,000)
C.CASH FLOW FROM FINANCING ACTIVITIES
Additional paid in capital	50,000
Payment of dividend (WN 6)	(100,000)
Stock option expense	(50,000)
Net cash used in financing activities		(100,000)
Net Increase in cash (A + B+ C)		145,000
Add: Cash at the beginning (or 2016)		70,000
Cash at the end (or 2017)		215,000

Working Notes (WN):

1: Cash received from customers:

=Sales revenue + Accounts Receivable, net 2016 -Accounts Receivable, net 2017

= $ 1,400,000+ $ 65,000- $ 87,000

=$ 1,378,000

2: Cash payments to suppliers:

=Cost of goods sold + Accounts payable 2016 -Accounts Payable 2017 + Inventory 2017 – Inventory 2016 + Prepaid expenses 2017 – Prepaid expenses 2016

=$ 780,000 + $ 40,000-$ 32,000 + $ 74,000 - $ 60,000 + $ 12,000 - $ 20,000

=$ 794,000

3: Cash payments for operating expenses:

= Operating expenses- Depreciation - Stock option expense + Decrease in accrued liabilities

=$ 290,000- $50,000 - $ 50,000 + $ 14,000

= $ 204,000

4. Income tax payment:

= Tax payable 2016 – Tax payable 2017 + Income tax expense 2017

= $ 4,000 - $ 15,000 + $ 66,000

= $ 55,000

5. Property, plant & equipment Account

Particulars	Debit Amount ($)	Particulars	Credit Amount ($)
Beginning Balance	600,000
Purchase: Note Payable : $ 100,000 Cash:               $ 80,000 (Balancing figure)	180,000	Ending Balance	780,000
Total	780,000	Total	780,000

6. Retained Earnings Account

Particulars	Debit Amount ($)	Particulars	Credit Amount ($)
		Beginning Balance	195,000
Dividend paid (Balancing figure)	100,000	Net Income (2017)	264,000
Ending Balance	359,000
Total	459,000	Total	459,000