Question

Chapman Company, a major retailer of bicycles and accessories, operates several stores and is a publicly traded company. The comparative balance sheet and income statement for Chapman as of May 31, 2017, are as follows. The company is preparing its statement of cash flows.

CHAPMAN COMPANY COMPARATIVE BALANCE SHEET AS OF MAY 31
	2017	2016
Current assets
Cash	$?28,250	$?20,000
Accounts receivable	75,000	58,000
Inventory	220,000	250,000
Prepaid expenses	???9,000	???7,000
Total current assets	?332,250	?335,000
Plant assets
Plant assets	600,000	502,000
Less: Accumulated depreciation—plant assets	?150,000	?125,000
Net plant assets	?450,000	?377,000
Total assets	$782,250	$712,000
Current liabilities
Accounts payable	$123,000	$115,000
Salaries and wages payable	??47,250	??72,000
Interest payable	??27,000	??25,000
Total current liabilities	?197,250	?212,000
Long-term debt
Bonds payable	??70,000	?100,000
Total liabilities	?267,250	?312,000
Stockholders' equity
Common stock, $10 par	??370,000	??280,000
Retained earnings	?145,000	?120,000
Total stockholders' equity	?515,000	?400,000
Total liabilities and stockholders' equity	$782,250	$712,000

CHAPMAN COMPANY INCOME STATEMENT FOR THE YEAR ENDED MAY 31, 2017
Sales revenue	$1,255,250
Cost of goods sold	???722,000
Gross profit	???533,250
Expenses
Salaries and wages expense	??252,100
Interest expense	???75,000
Depreciation expense	???25,000
Other expenses	?????8,150
Total expenses	???360,250
Operating income	??173,000
Income tax expense	????43,000
Net income	$??130,000

The following is additional information concerning Chapman's transactions during the year ended May 31, 2017.

1.All sales during the year were made on account.

2.All merchandise was purchased on account, comprising the total accounts payable account.

3.Plant assets costing $98,000 were purchased by paying $28,000 in cash and issuing 7,000 shares of stock.

4.The “other expenses” are related to prepaid items.

5.All income taxes incurred during the year were paid during the year.

6.In order to supplement its cash, Chapman issued 2,000 shares of common stock at par value.

7.Cash dividends of $105,000 were declared and paid at the end of the fiscal year.

Instructions

(a)  

Compare and contrast the direct method and the indirect method for reporting cash flows from operating activities.

(b)  

Prepare a statement of cash flows for Chapman Company for the year ended May 31, 2017, using the direct method. Be sure to support the statement with appropriate calculations. (A reconciliation of net income to net cash provided is not required.)

(c)  

Using the indirect method, calculate only the net cash flow from operating activities for Chapman Company for the year ended May 31, 2017.

Answer 1

		Chapman Company
		Statement of Cash Flow Direct Method
		For the year ended May 31,2017
	Cash Flow from operating activities
	Cash Received from customer		$ 1,238,250.00
	Cash Paid to
	To Suppliers	$                                                              684,000.00
	To Employees	$                                                              276,850.00
	Other Expenses	$                                                                 10,150.00
			$      971,000.00
	Interest Paid		$        73,000.00
	Cash paid for Income Taxes		$        43,000.00
	Net cash provided by operating activities=($1238250-$971000-$73000-$43000)		$      151,250.00
	Cash Flow from investing activities
	Purchase of Plant Assets		$      (28,000.00)
	Net cash used by investing activities
	Cash flow from financing activities
	Cash received from common stock issue	$                                                                 20,000.00
	Dividend payment	$                                                            (105,000.00)
	Retirment of bonds	$                                                              (30,000.00)	$   (115,000.00)
	Net cash used by financing activities		$   (115,000.00)
	Net increase in cash		$          8,250.00
	Cash January 1,2017		$        20,000.00
	Cash December 31st 2017		$        28,250.00
	Working
a	Cash received from customer
	Sales		$ 1,255,250.00
	Less:Increase in accounts receivable		$        17,000.00
	Cash received from customer		$ 1,238,250.00
b	Cash paid to supplier
	Cost of goods sold		$      722,000.00
	Less: Increase in accounts payable		$        (8,000.00)
	Less: Decrease in inventory		$      (30,000.00)
	Cash paid to supplier		$      684,000.00
c)	Salaries & Wages		$      252,100.00
	Add: Decrease in Salary Payable=($72000-$47250)		$        24,750.00
			$      276,850.00
c	Operating Expenses
	Other Expenses(Given)		$          8,150.00
	Plus: Increase in prepaid Expenses(9000-7000)		$          2,000.00
	Total		$        10,150.00
		CHAPMAN COMPANY
		Indirect Method
	Cash Flow from operating activities
	Net Income		$      130,000.00
	Depreciation Expense	$                                                                 25,000.00
	Decrease in Mercendise Invntory	$                                                                 30,000.00
	Increas in Accounts Receivable	$                                                              (17,000.00)
	Increase in Prepaid expenses	$                                                                 (2,000.00)
	Increase in Accounts Payable	$                                                                   8,000.00
	Increase in Interest Payable	$                                                                   2,000.00
	Decrease in Salary Payable	$                                                              (24,750.00)	$        21,250.00
	Net cash provided by operating activities		$      151,250.00
	Cash Flow from investing activities
	Purchase of Plant Assets		$      (28,000.00)
	Net cash used by investing activities
	Cash flow from financing activities
	Cash received from common stock issue	$                                                                 20,000.00
	Dividend payment	$                                                            (105,000.00)
	Retirment of bonds	$                                                              (30,000.00)	$   (115,000.00)
	Net cash used by financing activities		$   (115,000.00)
	Net increase in cash		$          8,250.00
	Cash January 1,2017		$        20,000.00
	Cash December 31st 2017		$        28,250.00