Question

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 Income Statement For Year Ended December 31, 2017
Sales		$582,500
Cost of goods sold		285,000
Gross profit		297,500
Operating expenses
Depreciation expense	$ 20,750
Other expenses	132,400	153,150
Other gains (losses)
Loss on sale of equipment		(5,125)
Income before taxes		139,225
Income taxes expense		24,250
Net income		$114,975
FORTEN COMPANY Comparative Balance Sheets December 31, 2017 and 2016
			2017		2016
Assets
Cash			$ 49,800		$ 73,500
Accounts receivable			65,810		50,625
Inventory			275,656		251,800
Prepaid expenses			1,250		1,875
Total current assets			392,516		377,800
Equipment			157,500		108,000
Accum. depreciation—Equipment			(36,625)		(46,000)
Total assets			$513,391		$439,800
Liabilities and Equity
Accounts payable			$ 53,141		$114,675
Short-term notes payable			10,000		6,000
Total current liabilities			63,141		120,675
Long-term notes payable			65,000		48,750
Total liabilities			128,141		169,425
Equity
Common stock, $5 par value			162,750		150,250
Paid-in capital in excess of par, common stock			37,500		0
Retained earnings			185,000		120,125
Total liabilities and equity			$513,391		$439,800

Additional Information on Year 2017 Transactions

The loss on the cash sale of equipment was $5,125 (details in b).

Sold equipment costing $46,875, with accumulated depreciation of $30,125, for $11,625 cash.

Purchased equipment costing $96,375 by paying $30,000 cash and signing a long-term note payable for the balance.

Borrowed $4,000 cash by signing a short-term note payable.

Paid $50,125 cash to reduce the long-term notes payable.

Issued 2,500 shares of common stock for $20 cash per share.

Declared and paid cash dividends of $50,100.

Required

Prepare a complete statement of cash flows; report its operating activities using the indirect method. Disclose any noncash investing and financing activities in a note.

Check Cash from operating activities, $40,900

Analysis Component

Analyze and discuss the statement of cash flows prepared in part 1, giving special attention to the wisdom of the cash dividend payment.

Answer 1

Cash flow indirect method
Cash flow from operating activities
Net income		114975
Adjustments to reconcile the net income
Depreciation expense	20750
Loss on sale of equipment	5125
Changes in current asset and liabilities
Decrease in prepaid expense	625
Increase in accounts receivable	-15185
Increase in Inventory	-23856
Decrease in accounts payable	-61534
Increase in Short term notes payable
		-74075
Cash flow from operating activities		40900
Cash flow from Investing activities
Equipment purchased	-30000
Equipment sold	11625
Cash flow from Investing activities		-18375

	Cash flow from Financing activities
	Common stock	50000
	Notes payable	4000
	Long term notes payable	-50125
	Dividend paid	-50100
	Cash flow from Financing activities		-46225
	Net Cash and cash equivalent		-23700
Add	Beginning cash and cash equivalent		73500
	Ending cash and cash equivalent		49800