Question

The CEO of Z-Corp is puzzled as to why the company has run into bank overdraft when it has been profitable in the past year. The financial statements appear below:-

Comparative Balance Sheets as at December 31

Assets 2019 2020

Bank          $ 28,600          $     -
Accounts receivable 21,850 38,000
Merchandise inventory 30,700 45,400
Prepaid expenses 5,520 4,900
Property, plant, and equipment           118,000           155,000
Accumulated depreciation            (54,500)          (65,400)
Total           150,170           177,900

Liabilities and Stockholders’ Equity 2019                2020

Bank overdraft           $     -          $ 39,200
Accounts payable 35,170 27,100
Income taxes payable 10,300 8,200
Bonds payable 30,000 10,000
Common stock 45,000 55,000
Retained earnings 29,700 38,400
Total           150,170           177,900

Income Statement for the year ended December 31, 2019

Sales                          250,000
Cost of goods sold      130,000
Gross profit                120,000
Selling expenses 45,000
Administrative expenses 19,000 64,000
Income from operations 56,000
Interest expense                1,500
Income before income taxes 54,500
Income tax expense        15,800
Net income after tax         38,700

Additional information regarding the year ended December 31, 2019

1) Dividends declared and paid were $30,000.
2) During the year an old equipment costing $15,000 was sold for $2,800 at a loss of $1,000. New equipment costing $22,000 was purchased to replace the old equipment.
3) Total depreciation expenses of $22,100 and the loss on sale of equipment are included in
            selling expenses.
4) Purchased property costing $30,000, full cash payment was made.
5) Bonds were redeemed at face value.
6) Additional shares of stock were issued for cash at par.
      
Required:
Prepare a cash flow statement for the year ended December 31, 2019 using the indirect method. (Show all relevant workings)

Answer 1

a) Cash flow statement: Indirect Method
Cash flows from operating activities:	Working	Amount $
Profit before tax	$          54,500.00
Adjustments:
Loss on sale of equipment	$            1,000.00
Depreciation-equipment	$          22,100.00
Interest expense	$            1,500.00
Operating profit from before working capital changes	$          79,100.00
Accounts receivable (increase)/decrease	$       (16,150.00)
inventory (increase)/decrease	$       (14,700.00)
Prepaid exp (increase)/decrease	$                620.00
Prepaid Insurance (increase)/decrease	$                         -
Account payable (decrease)/increase	$          (8,070.00)
Income tax payable (decrease)/increase	$          (2,100.00)
Utilities payable (decrease)/increase	$                         -
Cash generation from operation	$          38,700.00
Income tax expense	$       (15,800.00)
Net cash provided by operating activities		$          22,900.00
Cash flows from investing activities:
Net proceeds/(Purchase) of Investment	$                         -
Net proceeds/(Purchase) of Land	$                         -
Net proceeds/(Purchase) of Property Plant & Equipment	$       (52,000.00)
Net proceeds/(Purchase) of Property Plant & Equipment	$            2,800.00
Net cash used in investing activities		$        (49,200.00)
Cash flows from financing activities:
Net proceeds/(Repayment))of Bank OD	$          39,200.00
Net proceeds/(Repayment))of Issue of Common stock	$          10,000.00
Net proceeds/(Repayment))of Treasury stock	$                         -
Net proceeds/(Repayment))of Long term Notes payable	$                         -
Net proceeds/(Repayment))of Bond payable	$       (20,000.00)
Dividend paid	$       (30,000.00)
Interest paid	$          (1,500.00)
Net cash provided by financing activities		$          (2,300.00)
Net increase in cash		$        (28,600.00)
Opening Cash balance, 2019		$          28,600.00
Closing Cash balance, 2020		$                         -

Retained earnign
				Opening balance	$        29,700.00
	Divident paid	$        30,000.00		Net income	$        38,700.00
	Closing balance	$        38,400.00
		$        68,400.00			$        68,400.00
Income tax payable
	Tax paid	$        17,900.00		Opening balance	$        10,300.00
	Closing	$          8,200.00		PL	$        15,800.00
		$        26,100.00			$        26,100.00

Equipment
	Opening balance	$      118,000.00
	Addition Plant assets-cash	$        52,000.00		Sale of asset	$        15,000.00
	Note payable			Closing balance	$      155,000.00
		$      170,000.00			$      170,000.00
Accumulated depreciation
				Opening balance	$        54,500.00
	Sale of asset	$        11,200.00		Depreciation	$        22,100.00
	Closing balance	$        65,400.00
		$        76,600.00			$        76,600.00
Sale of Equipment
	Equipment	$        15,000.00		Acc. Dep	$        11,200.00
	gain on sale	$                       -		Loss on sale	$          1,000.00
				Proceeds from sale	$          2,800.00
		$        15,000.00			$        15,000.00

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