Question

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Forten Company, a merchandiser, recently completed its calendar-year 2017 operations. For the year, (1) all sales are credit sales, (2) all credits to Accounts Receivable reflect cash receipts from customers, (3) all purchases of inventory are on credit, (4) all debits to Accounts Payable reflect cash payments for inventory, and (5) Other Expenses are paid in advance and are initially debited to Prepaid Expenses. The company’s income statement and balance sheets follow.

FORTEN COMPANY Comparative Balance Sheets December 31, 2017 and 2016
	2017				2016
Assets
Cash	$	63,400			$	82,500
Accounts receivable		79,360				59,625
Inventory		289,156				260,800
Prepaid expenses		1,300				2,075
Total current assets		433,216				405,000
Equipment		148,500				117,000
Accum. depreciation—Equipment		(41,125	)			(50,500	)
Total assets	$	540,591			$	471,500
Liabilities and Equity
Accounts payable	$	62,141			$	128,175
Short-term notes payable		12,700				7,800
Total current liabilities		74,841				135,975
Long-term notes payable		60,500				57,750
Total liabilities		135,341				193,725
Equity
Common stock, $5 par value		180,750				159,250
Paid-in capital in excess of par, common stock		46,500				0
Retained earnings		178,000				118,525
Total liabilities and equity	$	540,591			$	471,500

  

FORTEN COMPANY Income Statement For Year Ended December 31, 2017
Sales				$	627,500
Cost of goods sold					294,000
Gross profit					333,500
Operating expenses
Depreciation expense	$	29,750
Other expenses		141,400			171,150
Other gains (losses)
Loss on sale of equipment					(14,125	)
Income before taxes					148,225
Income taxes expense					36,850
Net income				$	111,375

Problem 12-3A Indirect: Statement of cash flows LO A1, P1, P2, P3

Additional Information on Year 2017 Transactions

1. The loss on the cash sale of equipment was $14,125 (details in b).
2. Sold equipment costing $73,875, with accumulated depreciation of $39,125, for $20,625 cash.
3. Purchased equipment costing $105,375 by paying $48,000 cash and signing a long-term note payable for the balance.
4. Borrowed $4,900 cash by signing a short-term note payable.
5. Paid $54,625 cash to reduce the long-term notes payable.
6. Issued 3,400 shares of common stock for $20 cash per share.
7. Declared and paid cash dividends of $51,900.

Required:
1. Prepare a complete statement of cash flows; report its operating activities using the indirect method. (Amounts to be deducted should be indicated with a minus sign.)
  

Answer 1

Solution

FORTEN COMPANY
Cash Flow Statement
For the ended December 31, 2017
Cash Flow from Operating Activities:
Net Income	$     111,375.00
Adjustments to reconcile net income to net cash provided by operations:
Loss on sale of Equipment	$        14,125.00
Depreciation expense	$        29,750.00
Increase in Accounts receivables	$     (19,735.00)
Increase in Inventory	$     (28,356.00)
Decrease in prepaid expense	$              775.00
Decrease in accounts payable	$     (66,034.00)
A. Cash Flow from Operating Activities		$         41,900.00
Cash Flow from Investing Activities:
Sale of Equipment	$        20,625.00
Purchase of Equipment	$     (48,000.00)
B. Cash flow from Investing Activities		$       (27,375.00)
Cash Flow from Financing Activities:
Issue of Common Stock	$        68,000.00
Dividend paid	$     (51,900.00)
Proceeds from short term notes payable	$          4,900.00
Retirement of long term notes payable	$     (54,625.00)
C. Cash Flow from Financing Activities		$       (33,625.00)
Increase (Decrease) in cash [A+B+C]		$       (19,100.00)
Add: cash at the beginning of the year		$         82,500.00
Cash at the end of the year		$         63,400.00

.General notes for cash flow
Cash is increased when Current liability increase or Current asset Decrease.
Cash is Decreased when Current liability Decrease or Current asset Increase.
Depreciation or loss on sale of any asset is a non cash expense hence it will be added to net income to get operating cash
Profit on sale of asset or investment is a non cash profit and hence will be deducted from operating income.