Question

Presented below are changes in all the account balances of Wildhorse Furniture Co. during the current year, except for retained earnings.

		Increase (Decrease)					Increase (Decrease)
Cash		$70,140			Accounts Payable		$(52,210	)
Accounts Receivable (net)		52,900			Bonds Payable		82,530
Inventory		128,000			Common Stock		134,900
Investments		(48,240	)		Paid-In Capital in Excess of Par—Common Stock		13,110

Compute the net income for the current year, assuming that there were no entries in the Retained Earnings account except for net income and a dividend declaration of $28,270 which was paid in the current year.

Answer 1

Net income can be calculated by preparing the statement of cash flows by indirect method.

Statement of cash flows

I. Cash flows from operating activities
Net income	52,740
Adjustments to reconcile net income to
Increase in Accounts receivable	- 52,900
Increase in Inventory	- 128,000
Decrease in Accounts payable	- 52,210
Net cash used in operating activities		- 180,370
II. Cash flows from investing activities
Sale of investments	48,240
Net Cash flows from investing activities		48,240
III. Cash flows from financing activities
Issue of bonds payable	82,530
Issue of common stock	148,010
Dividend paid	- 28,270
Net Cash flows from financing activities		202,270
Net increase in cash (I + II + III)		70,140

(i)

Net increase in cash = Net cash used in operating activities + Net Cash flows from investing activities + Net Cash flows from financing activities

70,140 = Net cash used in operating activities + 202,270 + 48,240

Net cash used in operating activities = - 180,370

(ii)

Net cash used in operating activities = Net income - Increase in Accounts receivable - Increase in Inventory - Decrease in Accounts payable

- 180,370 = Net income - 52,900 - 128,000 - 52,210

Net income = 52,740