Question

The income statement, balance sheets, and additional information for Virtual Gaming Systems are provided.

VIRTUAL GAMING SYSTEMS Income Statement For the Year Ended December 31, 2021
Net sales					$	2,460,000
Gain on sale of land						6,000
Total revenues						2,466,000
Expenses:
Cost of goods sold	$	1,580,000
Operating expenses		601,000
Depreciation expense		19,000
Interest expense		20,000
Income tax expense		66,000
Total expenses						2,286,000
Net income					$	180,000

  

VIRTUAL GAMING SYSTEMS Balance Sheets December 31
	2021				2020
Assets
Current assets:
Cash	$	134,540			$	77,680
Accounts receivable		71,400				86,000
Inventory		139,000				131,000
Prepaid rent		3,160				4,920
Long-term assets:
Investments		201,000				120,000
Land		206,000				254,000
Equipment		222,000				206,000
Accumulated depreciation		(122,000	)			(103,000	)
Total assets	$	855,100			$	776,600
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable	$	28,000			$	84,000
Interest payable		3,700				2,600
Income tax payable		28,400				31,000
Long-term liabilities:
Notes payable		255,000				239,000
Stockholders' equity:
Common stock		306,000				260,000
Retained earnings		234,000				160,000
Total liabilities and stockholders’ equity	$	855,100			$	776,600

Additional Information for 2021:

1. Purchase additional investment in stocks for $81,000.

2. Sell land costing $48,000 for $54,000, resulting in a $6,000 gain on sale of land.

3. Purchase $16,000 in equipment by issuing a $16,000 long-term note payable to the seller. No cash is exchanged in the transaction.

4. Declare and pay a cash dividend of $106,000.

5. Issue common stock for $46,000.

Required:

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

Answer 1

A cash flow statement is prepared at the end of an accounting period to show the cash inflows and outflows of a business through its operating, investing and financing activities.

Operating activities show the cash inflows and outflows by operating activities of purchase and sale of goods and services. Investing activities show the cash inflows and outflows relating to the purchase of assets, investments and its sale. Financing activities show the cash inflows and outflows relating to the financing activities like issue of common stock, payment of dividend, etc.

Workings:

Cash collected from customers = Sales during the year + Beginning balance of Accounts receivable - Ending balance of Accounts receivable = $ 2,460,000 + $86,000 - $71,400 = $2,474,600

Cash paid to suppliers for inventory = Cost of goods sold + Ending inventory - Beginning inventory + Beginning accounts payable - Ending accounts payable = $ 1,580,000 + $139,000 - $131,000 + $84,000 - $28,000 = $1,644,000

Cash paid for interest expense = Interest expense during the year + Beginning balance of interest payable - Ending balance of interest payable =$20,000 + $2,600 - $3,700 = $18,900

Cash paid for operating expenses = Operating expense during the year + Beginning balance of prepaid rent - Ending balance of prepaid rent = $601,000 + $3,160 - $4,920 = $599,240

Cash paid for income tax expense = Income tax expense during the year + Beginning balance of income tax payable - Ending balance of income tax payable = $66,000 + $31,000 - $28,400 = $68,600