Question

P23-8.  

(SCF—Direct and Indirect Methods)

(LO 2, 4) Comparative balance sheet accounts of Sharpe Company are presented below.

SHARPE COMPANY COMPARATIVE BALANCE SHEET ACCOUNTS AS OF DECEMBER 31
Debit Balances	2017	2016
Cash	$?70,000	$?51,000
Accounts Receivable	155,000	130,000
Inventory	75,000	61,000
Debt investments (available-for-sale)	55,000	85,000
Equipment	70,000	48,000
Buildings	145,000	145,000
Land	??40,000	??25,000
Totals	$610,000	$545,000
Credit Balances
Allowance for Doubtful Accounts	$?10,000	$??8,000
Accumulated Depreciation—Equipment	21,000	14,000
Accumulated Depreciation—Buildings	37,000	28,000
Accounts Payable	66,000	60,000
Income Taxes Payable	12,000	10,000
Long-Term Notes Payable	62,000	70,000
Common Stock	310,000	260,000
Retained Earnings	??92,000	??95,000
Totals	$610,000	$545,000

Additional data:

1.Equipment that cost $10,000 and was 60% depreciated was sold in 2017.

2.Cash dividends were declared and paid during the year.

3.Common stock was issued in exchange for land.

4.Debt investments that cost $35,000 were sold during the year.

5.There were no write-offs of uncollectible accounts during the year.

Sharpe's 2017 income statement is as follows.

Sales revenue		$950,000
Less: Cost of goods sold		?600,000
Gross profit		?350,000
Less: Operating expenses (includes depreciation expense and bad debt expense)		?250,000
Income from operations		?100,000
Other revenues and expenses
Gain on sale of investments	$15,000?
Loss on sale of equipment	?(3,000)	??12,000
Income before taxes		?112,000
Income taxes		??45,000
Net income		$?67,000

Instructions

(a)  

Compute net cash provided by operating activities under the direct method.

(b)  

Prepare a statement of cash flows using the indirect method.

Answer 1

(a)  cash provided by operating activities under the direct method

Cash Flow Statement Direct Method
PARTICULARS	Amount	Amount
Operating Activities:
Cash receipt:
Collection from debtors	$    950,000.00
Net Sales	$    122,000.00
Add: Beginning accounts receivable net of doubtful debts
(130000 - 8000)	$    145,000.00
Less: Ending accounts receivables net of doubtful debts		$ 927,000.00
(155000 - 10000)
Cash Payment:
Payment to suppliers	$    600,000.00
Cost of goods sold	$      75,000.00
Add: Closing inventory	$      61,000.00
Less: Opening inventory	$      60,000.00
Add: Beginning accounts payable	$      66,000.00	$ 608,000.00
Less: Closing accounts payables
Cash paid for operating expenses
Operating Expenses	$    250,000.00
Less: Depreciation - Equipment	$      13,000.00
(21000 - 14000) + 60% of 10000
less: Depreciation Building	$         9,000.00
(37000 -28000)		$ 228,000.00
Income tax paid
Income tax expense	$      45,000.00
Add: Beginning tax payable	$      10,000.00
Less: Closing tax payable	$      12,000.00	$    43,000.00
Cash flows from (Used in) Operating Activities		$    48,000.00

(b) statement of cash flows using the indirect method

Sharpe Co.
Statement of Cash Flows
For the Year Ended December 31, 2017
Cash Flow From Operating Activities:
Net Income	$67,000
Add: Depreciation Expense	22,000
Subtract: Gain on Sale of Investments	(15,000)
Add: Loss on Sale of Equipment	3,000
Subtract: Increase in Accts Receivable (Net)	(23,000)
Subtract: Increase in Inventory	(14,000)
Add: Increase in Accounts Payable	6,000
Add: Increase in Taxes Payables	2,000
Total Cash From Operating Activities	48,000
Cash Flow From Investing Activities:
Purchase of Investments	(5,000)
Proceeds from Sale of Investments	50,000
Purchase of Equipment	(32,000)
Proceeds from Sale of Equipment	1,000
Total Cash From Investing Activities	14,000
Cash Flow From Financing Activities:
Payment on Notes Payable	(8,000)
Proceeds from Issued Common Stock	35,000
Cash Dividends Paid to Stockholders	(70,000)
Total Cash From Financing Activities	(43,000)
Net Increase in Cash for the Year	19,000
Beginning of Year Cash Balance	51,000
End of Year Cash Balance	$70,000
Noncash Investing and Financing Activities:
Issued Common Stock for Land	$15,000

	Analysis of Accounts
		Investments
	Beg Bal	85,000
			35,000	Sold
Purchased		5,000
	End Bal	55,000
		Equipment
	Beg Bal	48,000
			10,000	Sold
Purchased		32,000
	End Bal	70,000
		Land
	Beg Bal	25,000
Land Exch For Stock		15,000
	End Bal	40,000
Common Stock
	260,000	Beg Bal
	15,000	Issued Stock For Land
	35,000	Issued Stock For Cash
	310,000	End Bal
	Retained Earnings
		95,000	Beg Bal
Dividends	70,000	67,000	Net Inc
		92,000	End Bal
Investments
FV	50,000	Proceeds from sale of Investments
(BV)	(35,000)
G/L	15,000
Equipment
FV	1,000	Proceeds from sale of Equipment
(BV)	(4,000)	[10,000-6,000]
G/L	(3,000)