Question

The income statement, balance sheets, and additional information for Video Phones, Inc., are provided.   

VIDEO PHONES, INC. Income Statement For the Year Ended December 31, 2018
Net sales		$	3,386,000
Expenses:
Cost of goods sold	$ 2,200,000
Operating expenses	908,000
Depreciation expense	32,000
Loss on sale of land	8,500
Interest expense	17,500
Income tax expense	53,000
Total expenses			3,219,000
Net income		$	167,000

  

VIDEO PHONES, INC. Balance Sheet December 31
	2018		2017
Assets
Current assets:
Cash	$	270,300	$	185,900
Accounts receivable		86,500		65,000
Inventory		105,000		140,000
Prepaid rent		13,200		6,600
Long-term assets:
Investments		110,000		0
Land		215,000		250,000
Equipment		280,000		215,000
Accumulated depreciation		(75,000)		(43,000)
Total assets	$	1,005,000	$	819,500
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	70,500	$	86,000
Interest payable		6,500		11,000
Income tax payable		15,500		14,500
Long-term liabilities:
Notes payable		295,000		230,000
Stockholders' equity:
Common stock		350,000		350,000
Retained earnings		267,500		128,000
Total liabilities and stockholders’ equity	$	1,005,000	$	819,500

  

Additional Information for 2018:

1. Purchase investment in bonds for $110,000.
2. Sell land costing $35,000 for only $26,500, resulting in a $8,500 loss on sale of land.
3. Purchase $65,000 in equipment by issuing a $65,000 long-term note payable to the seller. No cash is exchanged in the transaction.
4. Declare and pay a cash dividend of $27,500.

  
Required:

Prepare the statement of cash flows using the indirect method. Disclose any noncash transactions in an accompanying note. (List cash outflows and any decrease in cash as negative amounts.)

Answer 1

Solution

VIDEO PHONES INC.
Statement of cash flows
For the year ended December 31 2018
A. Cash Flows from Operating Activity
Net Income		$      167,000.00
Adjustments to reconcile Net income to net cash flow from operating activities:
Depreciation expense	$      32,000.00
Loss on sale of Land	$         8,500.00
Changes in current operating assets and liabilities:
Increase in Accounts receivables	$    (21,500.00)
Decrease in Inventory	$      35,000.00
Decrsae in prepaid rent	$      (6,600.00)
Decrease in accounts payable	$    (15,500.00)
Decrease in interest payable	$      (4,500.00)
Increase in income taxes payable	$         1,000.00
		$        28,400.00
Net cash flow from Operating activities		$      195,400.00
B. Cash flows from Investing Activities
Purchase of Investment	$ (110,000.00)
Sale of Land	$      26,500.00
Net Cash flows from Investing activities		$      (83,500.00)
C. Cash Flows from Financing activities
Dividends paid	$    (27,500.00)
Cash flows from Financing activities		$      (27,500.00)
Net Increase (Decrease) in Cash [A+B+C]		$        84,400.00
Add: Cash at beginning		$      185,900.00
Cash at the end		$      270,300.00
Noncash activities
Purchase of Equipment in exchange of Notes payable	$      65,000.00

.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.