Question

Prepare a Statement of cash flows using the direct method (please show all calculations)

		2017	2016
Assets:
Cash		200,000	80,000
Accounts receivable, net		87,000	65,000
Inventory		55,000	50,000
Prepaid expenses		12,000	20,000
Property, plant & equipment		700,000	500,000
Accumulated depreciation		(100,000)	(60,000)
Total Assets		954,000	655,000
Liabilities & Equity
Accounts payable		37,000	25,000
Accrued liabilities		26,000	20,000
Taxes payable		15,000	5,000
Long-term Notes Payable		110,000	50,000
Common stock		100,000	100,000
Additional paid in capital		285,000	260,000
Retained earnings		381,000	195,000
Total liabilities and equity		954,000	655,000
Sales		1,200,000
Cost of goods sold		650,000
Gross profit		550,000
Operating expenses		180,000
Pre-tax income		370,000
Income taxes		74,000
Net income		296,000

a. Stock option expense of $25,000 was recognized in 2017
b. Equipment of $200,000 was purchased using $60,000 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)		1,178,000
Cash payments to suppliers (WN 2)		(635,000)
Cash payments for operating expenses (WN 3)		(109,000)
Cash payment for income tax expense (WN 4)		(64,000)
Net cash provided by operating activities		370,000
B.CASH FLOW FROM INVESTING ACTIVITIES
Purchase of equipment for cash (WN 5)	(140,000)
Net cash used in investing activities		( 140,000)
C.CASH FLOW FROM FINANCING ACTIVITIES
Additional paid in capital	25,000
Payment of dividend (WN 6)	(110,000)
Stock option expense	(25,000)
Net cash used in financing activities		(110,000)
Net Increase in cash (A + B+ C)		120,000
Add: Cash at the beginning (or 2016)		80,000
Cash at the end (or 2017)		200,000

Working Notes (WN):

1: Cash received from customers:

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

= $ 1,200,000 + $ 65,000- $ 87,000

=$ 1,178,000

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

=$ 650,000+ $ 25,000-$ 37,000+ $ 55,000- $ 50,000+ $ 12,000 - $ 20,000

=$ 635,000

3: Cash payments for operating expenses:

= Operating expenses- Depreciation - Stock option expense - Increase in accrued liabilities

=$ 180,000- $40,000 - $ 25,000 -$ 6,000

= $ 109,000

4. Income tax payment:

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

= $ 5,000 - $ 15,000 + $ 74,000

= $ 64,000

5. Property, plant & equipment Account

Particulars	Debit Amount ($)	Particulars	Credit Amount ($)
Beginning Balance	500,000
Purchase: Note Payable : $ 60,000 Cash:               $ 140,000 (Balancing figure)	200,000	Ending Balance	700,000
Total	700,000	Total	700,000

6. Retained Earnings Account

Particulars	Debit Amount ($)	Particulars	Credit Amount ($)
		Beginning Balance	195,000
Dividend paid (Balancing figure)	110,000	Net Income (2017)	296,000
Ending Balance	381,000
Total	491,000	Total	491,000