Question

A comparative balance sheet for the Stanley Corporation is presented below: Corporation Comparative Balance Sheet   2019   2018 Assets Cash $  37,000 $  31,000 Accounts receivable (net) 80,000 60,000 Prepaid insurance 22,000 17,000 Land 18,000 40,000 Equipment 70,000 60,000 Accumulated depreciation    (20,000)     (13,000) Total Assets $207,000 $195,000 Liabilities and Stockholders' Equity Accounts payable $  12,000 $   6,000 Bonds payable 27,000 19,000 Common stock 140,000 115,000 Retained earnings     28,000     55,000 Total liabilities and stockholders' equity $207,000 $195,000 Additional information: 1.     Net loss for 2019 is $12,000. Depreciation expense for 2019 is $ 17,000. 2.     Cash dividends of $15,000 were declared and paid in 2019. 3.     Land was sold for $ 20,000 cash, resulting in a loss of $2,000. This was the only        land transaction during the year. 4.     Equipment with a cost of $15,000 and accumulated depreciation of $10,000 was        sold for $5,000 cash. 5.     $12,000 of bonds were retired during the year at carrying (book) value. 6.     Equipment was acquired for common stock. The fair value of the stock at the time of the exchange was $25,000. Instructions Prepare a statement of cash flows for the year ended 2019 using the indirect method.

Answer 1

Cash flow statement using the Indirect method

Particulars	Amount ($)	Amount ($)
Cash flow from Operating Activities
Net loss	(12,000)
Add-Depreciation expense	17,000
Add-Loss on sale of land	2,000	7,000
Changes in working capital
Increase in Accounts receivable	(20,000)
Increase in Prepaid Insurance	(5,000)
Increase in Accounts payable	6,000	(19,000)
1.Net cash flow from Operating Activities		(12,000)
Cash flow from Financing Activities
Dividends paid	(15,000)
Bonds retired	(12,000)
Bonds issued	20,000
2.Net cash flow from Financing Activities		(7,000)
Cash flow from Investing Activities
Sale of land	20,000
Sale of Equipment	5,000
3.Net cash flow from Investing Activities		25,000
Net cash flow (1+2+3)		6,000
Cash balance at the beginning of the year		31,000
Cash balance at the end of the year		37,000

Note -

1.Depreciation charged for the year amounting to 17,000 and the loss on sale of land amounting to 2,000, does not lead to cash outflow or inflow hence their effect has to be removed from the net loss to reflect the cash profits earned for the year.

2.Increase in the value of current asset and decrease in the value of current liabilities lead to cash outflows ; Similarly decrease in the value of current asset and increase in the value of current liabilities lead to cash inflows. Hence are to be added or subtracted to reflect the real cash flow from operations.(shown under changes in working capital)

3.Cash dividends paid during the year are cash outflows and are to be shown under the Cash flow from Financing activities.

4.Cash received from sale of land (i.e. 20,000) is to be shown under cash flow from investing activities.

5.Equipment with a written down value of 5,000 was sold for cash value of 5,000, this cash sale should also be shown under cash flow from investing activities.

6.Working note for Bonds

Particulars	Amount
Opening balance	19,000
Less-Retired during the year	12,000
Less-Closing balance	27,000
Issued during the year	20,000

Cash flow resulting from issue of bonds or the retirement of bonds are to be shown under Financing activities.

7.Acquisition of Equipment by exchanging the common stock does not result in any cash flow and hence are to be ignored.

Cash outflows are shown as negatives (i.e within brackets).