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
Comparative Balance Sheets
December 31, 2017 and 2016

	2017	2016
	Assets
Cash	$69,400	$86,500
Accounts receivable	85,400	63,625
Inventory	295,156	264,800
Prepaid expenses	1,340	2,155
Total current assets	451,296	417,080
Equipment	144,500	121,000
Accum. depreciation—Equipment	(43,125)	(52,500)
Total assets	$552,671	$485,580
Liabilities and Equity
Accounts payable	$66,141	$134,175
Short-term notes payable	13,900	8,600
Total current liabilities	80,041	142,775
Long-term notes payable	58,500	61,750
Total liabilities	138,541	204,525
Equity
Common stock, $5 par value	188,750	163,250
Paid-in capital in excess of par, common stock	50,500	0
Retained earnings	174,880	117,805
Total liabilities and equity	$552,671	$485,580

  

FORTEN COMPANY
Income Statement
For Year Ended December 31, 2017

Sales		$647,500
Cost of goods sold		298,000
Gross profit		349,500
Operating expenses
Depreciation expense	$33,750
Other expenses	145,400	179,150
Other gains (losses)
Loss on sale of equipment		(18,125)
Income before taxes		152,225
Income taxes expense		42,450
Net income		$109,775

Additional Information on Year 2017 Transactions

The loss on the cash sale of equipment was $18,125 (details in b).

Sold equipment costing $85,875, with accumulated depreciation of $43,125, for $24,625 cash.

Purchased equipment costing $109,375 by paying $56,000 cash and signing a long-term note payable for the balance.

Borrowed $5,300 cash by signing a short-term note payable.

Paid $56,625 cash to reduce the long-term notes payable.

Issued 3,800 shares of common stock for $20 cash per share.

Declared and paid cash dividends of $52,700.

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

FORTEN COMPANY
Statement of Cash Flows
For Year Ended December 31, 2017
Cash flows from operating activities
Net Income	$109,775
Adjustments to reconcile net income to net cash provided by operations:
Depreciation expense	33,750
Accounts receivable increase	-21,775
Inventory increase	-30,356
Prepaid expense decrease	815
Accounts payable decrease	-68,034
Loss on disposal of equipment	18,125
Net cash provided by operating activities		$42,300
Cash flows from investing activities
Cash paid for equipment	-56,000
Cash received from sale of equipment	24,625
Net cash used in investing activities		-31375
Cash flows from financing activities:
Cash borrowed on short-term note	5,300
Cash paid on long-term note	-56,625
Cash received from issuing stock	76,000
Cash paid for dividends	-52,700
Net cash used in financing activities		-28025
Net increase (decrease) in cash		-17100
Cash balance at beginning of year		86,500
Cash balance at end of year		69,400