Question

The Diversified Portfolio Corporation provides investment advice to customers. A condensed income statement for the year ended December 31, 2018, appears below:

Service revenue	$	940,000
Operating expenses		720,000
Income before income taxes		220,000
Income tax expense		66,000
Net income	$	154,000

The following balance sheet information also is available:

	12/31/18			12/31/17
Cash	$	315,000		$	72,000
Accounts receivable		124,000			102,000
Accounts payable (operating expenses)		74,000			62,000
Income taxes payable		12,000			19,000

In addition, the following transactions took place during the year:

1. Common stock was issued for $104,000 in cash.
2. Long-term investments were sold for $52,000 in cash. The original cost of the investments also was $52,000.
3. $82,000 in cash dividends was paid to shareholders.
4. The company has no outstanding debt, other than those payables listed above.
5. Operating expenses include $32,000 in depreciation expense.

Required:
1. Prepare a statement of cash flows for 2018 for the Diversified Portfolio Corporation. Use the direct method for reporting operating activities.
2. Prepare the cash flows from operating activities section of Diversified’s 2018 statement of cash flows using the indirect method.

Answer 1

Cash receipts from customers = Revenue from sales - Increase in accounts receivables

= 940,000 - 22,000

= $918,000

Cash payment for operating expenses = Operating expenses - Depreciation -  Increase in accounts payable

= 720,000 - 32,000 - 12,000

= $676,000

Cash payment for income tax = Income tax expense + Decrease in income tax payable

= 66,000 + 7,000

= $73,000

Statement of cash flows

I. Cash flows from operating activities
Cash receipts from customers	918,000
Payment for operating expenses	- 676,000
Payment for income tax	- 73,000
Net cash provided by Operating Activities		169,000
II. Cash flows from investing activities
Sale of long term investments	52,000
Net Cash flows from investing activities		52,000
III. Cash flows from financing activities
Issue of common stock	104,000
Cash dividend paid	- 82,000
Net Cash flows from financing activities		22,000
Net increase in cash (I + II + III)		243,000
Cash balance, beginning		72,000
Cash balance, ending		315,000

cash flows from operating activities section

Net income	154,000
Adjustment to reconcile net income
Depreciation expense	32,000
Increase in current assets (Accounts receivable)	- 22,000
Increase in current liabilities (Accounts payable)	12,000
Decrease in current liabilities (Income tax payable)	- 7,000
Net cash flows from operating activities	169,000

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