Question

The following information was obtained from the accounting records and financial statements of Palmer Inc.

Assets	2019	2020	∆
Cash	$ 280,000	315,000	35,000
Accounts receivable	720,000	755,000	35,000
Inventory	855,000	800,000	(55,000)
Capital assets	1,720,000	1,930,000	210,000
Accumulated depreciation	(580,000)	(550,000)	30,000
Net capital assets	1,140,000	1,380,000	240,000
Total	2,995,000	3,250,000
Liabilities and Stockholders’ equity
Accounts payable	445,000	360,000	(85,000)
Interest payable	60,000	75,000	15,000
Income taxes payable	40,000	50,000	10,000
Bonds payable	800,000	900,000	100,000
Common stocks	1,200,000	1,350,000	150,000
Retained earnings	450,000	515,000	65,000
Total	2,995,000	3,250,000
Income Statement 2020
Sales	$ 3,200,000
Cost of goods sold	(2,100,000)
Gross profit	1,100,000
Depreciation expenses	(105,000)
Operating expenses	(655,000)
Interest expenses	(35,000)
Income tax expenses	(55,000)
Loss on retirement of bonds payable	(10,000)
Loss on disposal of capital assets	(20,000)
Net income	220,000

Additional information:

• On May 5, 2020 a capital asset with a cost of $225,000 and net book value of $90,000 was sold for $70,000.
• On September 1, 2020, Palmer issued 5% bonds for face value of $ 200,000.
• On October 15, 2020, bonds with a face value of $ 100,000 were retired for $ 110,000.
• On December 20, 2020, Palmer declared and paid cash dividends.

Required:

1. Prepare the cash flow statement, using the direct method, for Palmer for the year ended December 31, 2020.
2. Prepare the cash flows from operating activities, using the indirect method, for Palmer for the year ended December 31, 2020.

Answer 1

Workings

Indirect Method