Question

Problem 4-9 Statement of cash flows [LO4-8]

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

Service revenue	$	1,180,000
Operating expenses		840,000
Income before income taxes		340,000
Income tax expense		68,000
Net income	$	272,000

The following balance sheet information also is available:

	12/31/18			12/31/17
Cash	$	469,000		$	84,000
Accounts receivable		148,000			114,000
Accounts payable (operating expenses)		98,000			74,000
Income taxes payable		24,000			43,000

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

Common stock was issued for $128,000 in cash.

Long-term investments were sold for $64,000 in cash. The original cost of the investments also was $64,000.

$94,000 in cash dividends was paid to shareholders.

The company has no outstanding debt, other than those payables listed above.

Operating expenses include $44,000 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

Answer:-1)-

Diversified Portfolio Corporation

Statement of Cash Flows (Using direct method)

For the Year Ended December 31, 2018

Cash flows from operating activities:                                            Amount

Collections from customers (1)                                                     $1146000

Payment of operating expenses (2)                                                (772000)

Payment of income taxes (3)                                                           (87000)

Net cash flows from operating activities                                        $287000

Cash flows from investing activities:

Sale of investments                                                   64000

Net cash flows from investing activities                                         $64000

Cash flows from financing activities:

Proceeds from issue of ordinary shares                    128000

Payment of dividends                                               (94000)

Net cash flows from financing activities                                          34000

Increase in cash                                                                                385000

Cash and cash equivalents, January                                                  84000

Cash and cash equivalents, December 31$                                      469000

(1)$1180000 in service revenue less $34000 increase in accounts receivable =$1146000

(2)$840000 in operating expenses less $44000 in depreciation less $24000 increase in accounts payable = $772000

(3)$68000 in income tax expense plus $19000 decrease in income taxes payable=$87000.

2)-

Diversified Portfolio Corporation

Statement of Cash Flows (Indirect Method)

For the Year Ended December 31,2018

Cash flows from operating activities:                                             Amount

Net income                                                                                     $272000

Adjustments for noncash effects: Depreciation expense 44000

Changes in operating assets and liabilities:

Increase in accounts receivable                                                       (34000)

Increase in accounts payable                                                            24000

Decrease in income taxes payable                                                   (19000)

Net cash flows from operating activities                                         $287000