Question

The following information is taken from ABC Corporation's financial statements:

December 31 2011 2010 Cash $90,000 $ 27,000 Accounts receivable, net 87,500 76,900 Inventory 155,000 175,000 Prepaid expenses 7,500 6,800 Land 90,000 60,000 Buildings 287,000 244,000 Accumulated depreciation (32,000) (13,000) Patents 20,000 35,000 $705,000 $611,700

Accounts payable $ 90,000 $ 84,000 Accrued liabilities 54,000 63,000 Bonds payable 125,000 60,000 Common stock 100,000 100,000 Retained earnings 351,000 312,700 Treasury stock, at cost (15,000) (8,000) $705,000 $611,700

For 2011 Year Net income $58,300 Net sales 218,000 COGS 108,000 Depreciation expense 19,000 Amortization of patents 5,000 Cash dividends declared and paid 20,000 Gain or loss on sale of patents none


Required:

1. Prepare a Statement of Cash Flows for ABC Corporation for the year 2011. (Use the indirect method.)

2. From the information provided, calculate the following items for the direct method.

A. Cash received from customers. (Hint: Work on A/R account.)

B. Cash paid to suppliers. (Hint: Work on Inventory and A/P accounts.)

Answer 1

When statement of cash flow is prepared under indirect method, it starts with net income. Net income is then adjusted for non-cash expenditure or income. The changes in current assets and liabilities is to be adjusted. Increase in current asset and decrease in current liability will be deducted. Increase in current liability and decrease in current assets is added to the net income.

Cash flow statement consists of cash flow from operating activities, investing activities and financing activities. Cash flow operating activities is the cash flow from day-to-day business of the company. Cash flow from investing activity relates to purchase and sell of assets. Cash flow from financing activities is the cash flow to or from the parties who have provided finance to the business like stockholders, lenders.