Question

Natalie has prepared the balance sheet and income statement of Cookie & Coffee Creations Inc. and would like you to prepare the cash flow statement. The comparative balance sheet of Cookie & Coffee Creations Inc. at October 31, 2020 for the years 2020 and 2019 and the income statement for the year ended October 31, 2020, are presented below.

Additional information:

1.   Equipment (cost $4,500 and book value $3,000) was disposed of at the beginning of the year for $500 cash and replaced with new equipment purchased for $4,000 cash.

2.   Additional equipment was bought for $14,000 on November 1, 2019. A $12,000 note payable was signed. The terms provide for equal semi-annual installment payments of $2,000 on May 1 and November 1 of each year, plus interest of 5% on the outstanding principal balance.

3.   Other equipment was bought for $13,000 cash.

4.   Dividends were declared on the preferred and common stock on October 15, 2020, to be paid on November 15, 2018.

5.   Accounts payable relate only to merchandise creditors.

6.   Prepaid expenses relate only to other operating expenses.

Instructions:

(a) Prepare a statement of cash flows for Cookie & Coffee Creations Inc. for the year ended October 31, 2020, using the indirect method.

*(b)            Prepare a statement of cash flows for Cookie & Coffee Creations Inc. for the year ended October 31, 2020, using the direct method.

COOKIE & COFFEE CREATIONS INC.

Balance Sheet

October 31,

Assets	2020	2019
Cash	$ 22,324	$5,550
Accounts receivable	3,250	2,710
Inventory	7,897	7,450
Prepaid expenses	5,800	6,050
Equipment	102,000	75,500
Accumulated depreciation—
equipment	(25,200)	(9,100)
Total assets	$116,071	$88,160

COOKIE & COFFEE CREATIONS INC.

Balance Sheet

October 31,

Liabilities and Stockholders’ Equity	2020		2019
Accounts payable	$ 1,150		$ 2,450
Income taxes payable	9,251		7,200
Dividends payable	27,000		27,000
Salaries and wages payable	7,250		1,280
Interest payable	188		0
Note payable	10,000		0
Preferred stock, no par, $6 cumulative,
3,000 and 2,800 shares issued,
respectively	15,000		14,000
Common stock, $1 par—25,180 shares
issued and outstanding	25,180		25,180
Additional paid-in capital—treasury stock	250		250
Retained earnings	20,802		10,800
Total liabilities and stockholders’ equity	$116,071		$88,160

COOKIE & COFFEE CREATIONS INC.

Income Statement

Year Ended October 31, 2020

Sales		$485,625
Cost of goods sold		222,694
Gross profit		262,931
Operating expenses
Salaries and wages expense	$147,979
Depreciation expense	17,600
Other operating expenses	48,186	213,765
Income from operations		49,166
Other expenses
Interest expense	$    413
Loss on disposal of plant
assets	2,500	2,913
Income before income tax		46,253
Income tax expense		9,251
Net income		$ 37,002

Answer 1

Cash flow from operating activities
Net income		37002
Loss on sale of equipment	2500
Depreciation expense	17600
Increase in accounts receivable	-540
Increase in Inventory	-447
Decrease in prepaid rent	250
Increase in interest payable	188
Increase in salaries and wages payable	5970
Increase in income tax payable	2051
Decrease in accounts payable	-1300	26272
Cash flow from operating activities		63274
Cash flow from Investing activities
Investment
Purchase of Equipment (4000+13000+4000)	-21000
Sale of Equipment	500
Cash flow from Investing activities		-20500

	Cash flow from Financing activities
	Notes payable
	Preferred stock	1000
	Cash dividend	-27000
	Cash flow from Financing activities		-26000
	Net Cash and cash equivalent		16774
Add	Beginning cash and cash equivalent		5550
	Ending cash and cash equivalent		22324