Question & Answer

What are the major advantages of notes to the financial statements? What types of items are usually reported in notes?

Founded in the early 1980s, the Vermont Teddy Bear Co. designs and manufactures American-made teddy bears and markets them primarily as gifts called Bear-Grams or Teddy Bear-Grams. Bear-Grams are personalized teddy bears delivered directly to the recipient for special occasions such as birthdays and anniversaries. The Shelburne, Vermont, company’s primary markets are New York, Boston, and Chicago.

Sales have jumped dramatically in recent years. Such dramatic growth has significant implications for cash flows. Provided below are the cash flow statements for two recent years for the company.

Current Year Prior Year

Cash fl ows from operating activities:

Net income $ 17,523 $ 838,955

Adjustments to reconcile net income to net cash provided by operating activities

Deferred income taxes (69,524) (146,590)

Depreciation and amortization 316,416 181,348

Changes in assets and liabilities:

Accounts receivable, trade (38,267) (25,947)

Inventories (1,599,014) (1,289,293)

Prepaid and other current assets (444,794) (113,205)

Deposits and other assets (24,240) (83,044)

Accounts payable 2,017,059 (284,567)

Accrued expenses 61,321 170,755

Accrued interest payable, debentures — (58,219)

Other — (8,960)

Income taxes payable — 117,810

Net cash provided by (used for) operating activities 236,480 (700,957)

Net cash used for investing activities (2,102,892) (4,422,953)

Net cash (used for) provided by fi nancing activities (315,353) 9,685,435

Net change in cash and cash equivalents (2,181,765) 4,561,525

Other information:

Current liabilities $ 4,055,465 $ 1,995,600

Total liabilities 4,620,085 2,184,386

Net sales 20,560,566 17,025,856

Instructions

(a) Note that net income in the current year was only $17,523 compared to prior-year income of $838,955, but net cash flow from operating activities was $236,480 in the current year and a negative $700,957 in the prior year. Explain the causes of this apparent paradox.

(b) Evaluate Vermont Teddy Bear’s liquidity, solvency, and profitability for the current year using cash flow-based ratios.

Instructions

Go to the book’s companion website and use information found there to answer the following questions related to The Coca-Cola Company and PepsiCo, Inc.

(a) What method of computing net cash provided by operating activities does Coca-Cola use? What method does PepsiCo use? What were the amounts of cash provided by operating activities reported by Coca-Cola and PepsiCo in 2011?

(b) What was the most significant item reported by Coca-Cola and PepsiCo in 2011 in their investing activities sections? What is the most significant item reported by Coca-Cola and PepsiCo in 2011 in their financing activities sections?

(c) What were these two companies’ trends in net cash provided by operating activities over the period 2009 to 2011?

(d) Where is “depreciation and amortization” reported by Coca-Cola and PepsiCo in their statements of cash flows? What is the amount and why does it appear in that section of the statement of cash flows?

(e) Based on the information contained in Coca-Cola’s and PepsiCo’s financial statements, compute the following 2011 ratios for each company. These ratios require the use of statement of cash flows data.

(These ratios were covered in Chapter 5.)

(1) Current cash debt coverage.

(2) Cash debt coverage.

(f) What conclusions concerning the management of cash can be drawn from the ratios computed in (e)?

As part of the year-end accounting process for your company, you are preparing the statement of cash flows according to IFRS. One of your team, a finance major, believes the statement should be prepared to report the change in working capital because analysts many times use working capital in ratio analysis.

Your supervisor would like research conducted to verify the basis for preparing the statement of cash flows.

Instructions

Access the IFRS authoritative literature at the IASB website (http://eifrs.iasb.org/). (Click on the IFRS tab and then register for free eIFRS access if necessary.) When you have accessed the documents, you can use the search tool in your Internet browser to respond to the following questions. (Provide paragraph citations.)

(a) What is the primary objective for the statement of cash flows? Is working capital the basis for meetingthis objective?

(b) What information is provided in a statement of cash flows?

(c) List some of the typical cash inflows and outflows from operations.

Dingel Corporation has contracted with you to prepare a statement of cash flows. The controller has provided the following information.

December 31

2014 2013

Buildings $ –0– $29,750

Equipment 45,000 20,000

Patents 5,000 6,250

Investments –0– 3,000

Inventory 12,000 9,000

Accounts receivable 12,250 10,000

Cash 33,500 13,000

$107,750 $91,000

Share capital—ordinary $ 43,000 $33,000

Retained earnings 20,750 6,000

Allowance for doubtful accounts 3,000 4,500

Accumulated depreciation on equipment 2,000 4,500

Accumulated depreciation on buildings –0– 6,000

Accounts payable 5,000 3,000

Dividends payable –0– 5,000

Long-term notes payable 31,000 25,000

Notes payable, short-term (non-trade) 3,000 4,000

$107,750 $91,000

Additional data related to 2014 are as follows.

1. Equipment that had cost $11,000 and was 40% depreciated at time of disposal was sold for $2,500.

2. $10,000 of the long-term notes payable was paid by issuing ordinary shares.

3. Cash dividends paid were $5,000.

4. On January 1, 2014, the building was completely destroyed by a flood. Insurance proceeds on the building were $32,000.

5. Equity investments (non-trading) were sold at $1,700 above their cost.

6. Cash was paid for the acquisition of equipment.

7. A long-term note for $16,000 was issued for the acquisition of equipment.

8. Interest of $2,000 and income taxes of $6,500 were paid in cash.

Instructions

Prepare a statement of cash flows using the indirect method.

Following are selected statement of financial position accounts of Sander Bros. Corp. at

December 31, 2014 and 2013, and the increases or decreases in each account from 2013 to 2014. Also presented is selected income statement information for the year ended December 31, 2014, and additional information. Increase

Selected statement of fi nancial position accounts 2014 2013 (Decrease)

Assets

Property, plant, and equipment $277,000 $247,000 $30,000

Accumulated depreciation (178,000) (167,000) (11,000)

Accounts receivable 34,000 24,000 10,000

Equity and liabilities

Share capital—ordinary, $1 par $ 22,000 $ 19,000 $ 3,000

Share premium—ordinary 9,000 3,000 6,000

Retained earnings 104,000 91,000 13,000

Bonds payable 49,000 46,000 3,000

Dividends payable 8,000 5,000 3,000

Selected income statement information for the year ended December 31, 2014

Sales revenue $155,000

Depreciation 38,000

Gain on sale of equipment 14,500

Net income 31,000

Additional information:

1. During 2014, equipment costing $45,000 was sold for cash.

2. Accounts receivable relate to sales of merchandise.

3. During 2014, $25,000 of bonds payable were issued in exchange for property, plant, and equipment.

There was no amortization of bond discount or premium.

Instructions

Determine the category (operating, investing, or financing) and the amount that should be reported in the statement of cash flows for the following items.

(a) Payments for purchase of property, plant, and equipment.

(b) Proceeds from the sale of equipment.

(c) Cash dividends paid.

(d) Redemption of bonds payable.

Springsteen Co. had the following activity in its most recent year of operations.

(a) Pension expense exceeds amount funded. (g) Amortization of intangible assets.

(b) Redemption of bonds payable. (h) Purchase of treasury shares.

(c) Sale of building at book value. (i) Issuance of bonds for land.

(d) Depreciation. (j) Payment of dividends.

(e) Exchange of equipment for furniture. (k) Increase in interest receivable on notes receivable.

(f) Issuance of ordinary shares. (l) Purchase of equipment.

Instructions

Classify the items as (1) operating—add to net income, (2) operating—deduct from net income, (3) investing, (4) financing, or (5) significant non-cash investing and financing activities. Use the indirect method.

Stan Conner and Mark Stein were discussing the statement of cash flows of Bombeck Co. In the notes to the statement of cash flows was a schedule entitled “Non-cash investing and financing activities.” Give three examples of significant non-cash transactions that would be reported in this schedule.

What are some of the key obstacles for the FASB and IASB within their accounting guidance in the area of cash flow reporting? Explain.

Briefly describe some of the similarities and differences between GAAP and IFRS with respect to cash flow reporting.

Where can authoritative IFRS related to the statement of cash flows be found?

As part of the year-end accounting process for your company, you are preparing the statement of cash flows according to GAAP. One of your team, a finance major, believes the statement should be prepared to report the change in working capital, because analysts many times use working capital in ratio analysis. Your supervisor would like research conducted to verify the basis for preparing the statement of cash flows.

Instructions

If your school has a subscription to the FASB Codification, go to http://aaahq.org/ascLogin.cfm to log in and prepare responses to the following. Provide Codification references for your responses.

(a) What is the primary objective for the statement of cash flows? Is working capital the basis for meeting this objective?

(b) What information is provided in a statement of cash flows?

(c) List some of the typical cash inflows and outflows from operations.

The financial statements of P&G are presented in Appendix 5B. The company’s complete annual report, including the notes to the financial statements, can be accessed at the book’s companion website, www.

wiley.com/college/kieso.

Instructions

Refer to P&G’s financial statements and the accompanying notes to answer the following questions.

(a) Which method of computing net cash provided by operating activities does P&G use? What were the amounts of net cash provided by operating activities for the years 2009, 2010, and 2011? Which two items were most responsible for the decrease in net cash provided by operating activities in 2011?

(b) What was the most significant item in the cash flows used for investing activities section in 2011?

What was the most significant item in the cash flows used for financing activities section in 2011?

(c) Where is “deferred income taxes” reported in P&G’s statement of cash flows? Why does it appear in that section of the statement of cash flows?

(d) Where is depreciation reported in P&G’s statement of cash flows? Why is depreciation added to net income in the statement of cash flows?

Brockman Guitar Company is in the business of manufacturing topquality, steel-string folk guitars. In recent years, the company has experienced working capital problems resulting from the procurement of factory equipment, the unanticipated buildup of receivables and inventories, and the payoff of a balloon mortgage on a new manufacturing facility. The founder and president of the company, Barbara Brockman, has attempted to raise cash from various financial institutions, but to no avail because of the company’s poor performance in recent years. In particular, the company’s lead bank, First Financial, is especially concerned about Brockman’s inability to maintain a positive cash position. The commercial loan officer from First Financial told Barbara, “I can’t even consider your request for capital financing unless I see that your company is able to generate positive cash flows from operations.” Thinking about the banker’s comment, Barbara came up with what she believes is a good plan: With a more attractive statement of cash flows, the bank might be willing to provide long-term financing. To “window dress” cash flows, the company can sell its accounts receivables to factors and liquidate its raw materials inventories. These rather costly transactions would generate lots of cash. As the chief accountant for Brockman Guitar, it is your job to tell Barbara what you think of her plan.

Instructions

Answer the following questions.

(a) What are the ethical issues related to Barbara Brockman’s idea?

(b) What would you tell Barbara Brockman?

GAAP requires the statement of cash flows be presented when financial statements are prepared.

Instructions

(a) Explain the purposes of the statement of cash flows.

(b) List and describe the three categories of activities that must be reported in the statement of cash flows.

(c) Identify and describe the two methods that are allowed for reporting cash flows from operations.

(d) Describe the financial statement presentation of noncash investing and financing transactions.

Include in your description an example of a noncash investing and financing transaction.

Each of the following items must be considered in preparing a statement of cash flows for Cruz Fashions Inc. for the year ended December 31, 2014.

1. Fixed assets that had cost $20,000 61⁄2 years before and were being depreciated on a 10-year basis, with no estimated scrap value, were sold for $4,750.

2. During the year, goodwill of $15,000 was considered impaired and was completely written off to expense.

3. During the year, 500 shares of common stock with a stated value of $25 a share were issued for $32 a share.

4. The company sustained a net loss for the year of $2,100. Depreciation amounted to $2,000 and patent amortization was $400.

5. Uncollectible accounts receivable in the amount of $2,000 were written off against Allowance for Doubtful Accounts.

6. Investments (available-for-sale) that cost $12,000 when purchased 4 years earlier were sold for $10,600. The loss was considered ordinary.

7. Bonds payable with a par value of $24,000 on which there was an unamortized bond premium of $2,000 were redeemed at 101. The gain was credited to ordinary income.

Instructions

For each item, state where it is to be shown in the statement and then how you would present the necessary information, including the amount. Consider each item to be independent of the others. Assume that correct entries were made for all transactions as they took place.

Ashley Company is a young and growing producer of electronic measuring instruments and technical equipment. You have been retained by Ashley to advise it in the preparation of a statement of cash flows using the indirect method. For the fiscal year ended October 31, 2014, you have obtained the following information concerning certain events and transactions of Ashley.

1. The amount of reported earnings for the fiscal year was $700,000, which included a deduction for an extraordinary loss of $110,000 (see item 5 below).

2. Depreciation expense of $315,000 was included in the income statement.

3. Uncollectible accounts receivable of $40,000 were written off against the allowance for doubtful accounts. Also, $51,000 of bad debt expense was included in determining income for the fiscal year, and the same amount was added to the allowance for doubtful accounts.

4. A gain of $6,000 was realized on the sale of a machine. It originally cost $75,000, of which $30,000 was undepreciated on the date of sale.

5. On April 1, 2014, lightning caused an uninsured building loss of $110,000 ($180,000 loss, less reduction in income taxes of $70,000). This extraordinary loss was included in determining income as indicated in item 1 above.

6. On July 3, 2014, building and land were purchased for $700,000. Ashley gave in payment $75,000 cash, $200,000 market price of its unissued common stock, and signed a $425,000 mortgage note payable.

7. On August 3, 2014, $800,000 face value of Ashley’s 10% convertible debentures was converted into $150,000 par value of its common stock. The bonds were originally issued at face value.

Instructions

Explain whether each of the seven numbered items above is a cash inflow or outflow, and explain how it should be disclosed in Ashley’s statement of cash flows for the fiscal year ended October 31, 2014. If any item is neither an inflow nor an outflow of cash, explain why it is not, and indicate the disclosure, if any, that should be made of the item in Ashley’s statement of cash flows for the fiscal year ended October 31, 2014.

Teresa Ramirez and Lenny Traylor are examining the following statement of cash flows for Pacific Clothing Store’s first year of operations.

PACIFIC CLOTHING STORE

STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED JANUARY 31, 2014

Sources of cash

From sales of merchandise $ 382,000

From sale of capital stock 380,000

From sale of investment 120,000

From depreciation 80,000

From issuance of note for truck 30,000

From interest on investments 8,000

Total sources of cash 1,000,000

PACIFIC CLOTHING STORE

STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED JANUARY 31, 2014

(CONTINUED)

Uses of cash

For purchase of fi xtures and equipment 330,000

For merchandise purchased for resale 253,000

For operating expenses (including depreciation) 170,000

For purchase of investment 95,000

For purchase of truck by issuance of note 30,000

For purchase of treasury stock 10,000

For interest on note 3,000

Total uses of cash 891,000

Net increase in cash $ 109,000

Teresa claims that Pacific’s statement of cash flows is an excellent portrayal of a superb first year, with cash increasing $109,000. Lenny replies that it was not a superb first year—that the year was an operating failure, the statement was incorrectly presented, and $109,000 is not the actual increase in cash.

Instructions

(a) With whom do you agree, Teresa or Lenny? Explain your position.

(b) Using the data provided, prepare a statement of cash flows in proper indirect method form.

The only noncash items in income are depreciation and the gain from the sale of the investment

 purchase and sale are related).

The following statement was prepared by Maloney Corporation’s accountant.

MALONEY CORPORATION

STATEMENT OF SOURCES AND APPLICATION OF CASH

FOR THE YEAR ENDED SEPTEMBER 30, 2014

Sources of cash

Net income $111,000

Depreciation and depletion 70,000

Increase in long-term debt 179,000

Changes in current receivables and inventories, less current liabilities (excluding current maturities of long-term debt) 14,000

$374,000

Application of cash

Cash dividends $ 60,000

Expenditure for property, plant, and equipment 214,000

Investments and other uses 20,000

Change in cash 80,000

$374,000

The following additional information relating to Maloney Corporation is available for the year ended

September 30, 2014.

1. Salaries and wages expense attributable to stock option plans was $25,000 for the year.

2. Expenditures for property, plant, and equipment $250,000

Proceeds from retirements of property, plant, and equipment 36,000

Net expenditures $214,000

3. A stock dividend of 10,000 shares of Maloney Corporation common stock was distributed to common stockholders on April 1, 2014, when the per share market price was $7 and par value was $1.

4. On July 1, 2014, when its market price was $6 per share, 16,000 shares of Maloney Corporation common stock were issued in exchange for 4,000 shares of preferred stock.

5. Depreciation expense $ 65,000

Depletion expense 5,000

$ 70,000

6. Increase in long-term debt $620,000

Less: Redemption of debt 441,000

Net increase $179,000

Instructions

(a) In general, what are the objectives of a statement of the type shown above for Maloney Corporation?

Explain.

(b) Identify the weaknesses in the form and format of Maloney Corporation’s statement of cash flows without reference to the additional information. (Assume adoption of the indirect method.)

(c) For each of the six items of additional information for the statement of cash flows, indicate the preferable treatment and explain why the suggested treatment is preferable.

Dingel Corporation has contracted with you to prepare a statement of cash flows. The controller has provided the following information.

December 31

2014 2013

Cash $ 38,500 $13,000

Accounts receivable 12,250 10,000

Inventory 12,000 10,000

Investments –0– 3,000

Buildings –0– 29,750

Equipment 40,000 20,000

Copyrights 5,000 5,250

Totals $107,750 $91,000

Allowance for doubtful accounts $ 3,000 $ 4,500

Accumulated depreciation—equipment 2,000 4,500

Accumulated depreciation—buildings –0– 6,000

Accounts payable 5,000 4,000

Dividends payable –0– 5,000

Notes payable, short-term (nontrade) 3,000 4,000

Long-term notes payable 36,000 25,000

Common stock 38,000 33,000

Retained earnings 20,750 5,000

$107,750 $91,000

Additional data related to 2014 are as follows.

1. Equipment that had cost $11,000 and was 30% depreciated at time of disposal was sold for $2,500.

2. $5,000 of the long-term note payable was paid by issuing common stock.

3. Cash dividends paid were $5,000.

4. On January 1, 2014, the building was completely destroyed by a flood. Insurance proceeds on the building were $33,000 (net of $4,000 taxes).

5. Investments (available-for-sale) were sold at $1,500 above their cost. The company has made similar sales and investments in the past.

6. Cash and long-term note for $16,000 were given for the acquisition of equipment.

7. Interest of $2,000 and income taxes of $5,000 were paid in cash.

Instructions

(a) Use the indirect method to analyze the above information and prepare a statement of cash flows for

Dingel. Flood damage is unusual and infrequent in that part of the country.

(b) What would you expect to observe in the operating, investing, and financing sections of a statement of cash flows of:

(1) A severely financially troubled firm?

(2) A recently formed firm that is experiencing rapid growth?

Comparative balance sheet accounts of Sharpe Company are presented below.

SHARPE COMPANY

COMPARATIVE BALANCE SHEET ACCOUNTS

AS OF DECEMBER 31

Debit Balances 2014 2013

Cash $ 70,000 $ 51,000

Accounts Receivable 155,000 130,000

Inventory 75,000 61,000

Investments (available-for-sale) 55,000 85,000

Equipment 70,000 48,000

Buildings 145,000 145,000

Land 40,000 25,000

Totals $610,000 $545,000

Credit Balances

Allowance for Doubtful Accounts $ 10,000 $ 8,000

Accumulated Depreciation—Equipment 21,000 14,000

Accumulated Depreciation—Buildings 37,000 28,000

Accounts Payable 66,000 60,000

Income Taxes Payable 12,000 10,000

Long-Term Notes Payable 62,000 70,000

Common Stock 310,000 260,000

Retained Earnings 92,000 95,000

Totals $610,000 $545,000

Additional data:

1. Equipment that cost $10,000 and was 60% depreciated was sold in 2014.

2. Cash dividends were declared and paid during the year.

3. Common stock was issued in exchange for land.

4. Investments that cost $35,000 were sold during the year.

5. There were no write-offs of uncollectible accounts during the year.

Sharpe’s 2014 income statement is as follows.

Sales revenue $950,000

Less: Cost of goods sold 600,000

Gross profi t 350,000

Less: Operating expenses (includes depreciation expense and bad debt expense) 250,000

Income from operations 100,000

Other revenues and expenses

Gain on sale of investments $15,000

Loss on sale of equipment (3,000) 12,000

Income before taxes 112,000

Income taxes 45,000

Net income $ 67,000

Instructions

(a) Compute net cash provided by operating activities under the direct method.

(b) Prepare a statement of cash flows using the indirect method.

Chapman Company, a major retailer of bicycles and accessories, operates several stores and is a publicly traded company. The comparative balance sheet and income statement for Chapman as of May 31, 2014, are as follows. The company is preparing its statement of cash flows.

CHAPMAN COMPANY

COMPARATIVE BALANCE SHEET

AS OF MAY 31

2014 2013

Current assets

Cash $ 28,250 $ 20,000

Accounts receivable 75,000 58,000

Inventory 220,000 250,000

Prepaid expenses 9,000 7,000

Total current assets 332,250 335,000

Plant assets

Plant assets 600,000 502,000

Less: Accumulated depreciation—plant assets 150,000 125,000

Net plant assets 450,000 377,000

Total assets $782,250 $712,000

Current liabilities

Accounts payable $123,000 $115,000

Salaries and wages payable 47,250 72,000

Interest payable 27,000 25,000

Total current liabilities 197,250 212,000

Long-term debt

Bonds payable 70,000 100,000

Total liabilities 267,250 312,000

Stockholders’ equity

Common stock, $10 par 370,000 280,000

Retained earnings 145,000 120,000

Total stockholders’ equity 515,000 400,000

Total liabilities and stockholders’ equity $782,250 $712,000

CHAPMAN COMPANY

INCOME STATEMENT

FOR THE YEAR ENDED MAY 31, 2014

Sales revenue $1,255,250

Cost of goods sold 722,000

Gross profi t 533,250

Expenses

Salaries and wages expense 252,100

Interest expense 75,000

Depreciation expense 25,000

Other expenses 8,150

Total expenses 360,250

Operating income 173,000

Income tax expense 43,000

Net income $ 130,000

The following is additional information concerning Chapman’s transactions during the year ended

May 31, 2014.

1. All sales during the year were made on account.

2. All merchandise was purchased on account, comprising the total accounts payable account.

3. Plant assets costing $98,000 were purchased by paying $28,000 in cash and issuing 7,000 shares of stock.

4. The “other expenses” are related to prepaid items.

5. All income taxes incurred during the year were paid during the year.

6. In order to supplement its cash, Chapman issued 2,000 shares of common stock at par value.

7. Cash dividends of $105,000 were declared and paid at the end of the fiscal year.

Instructions

(a) Compare and contrast the direct method and the indirect method for reporting cash flows from operating activities.

(b) Prepare a statement of cash flows for Chapman Company for the year ended May 31, 2014, using the direct method. Be sure to support the statement with appropriate calculations. (A reconciliation of net income to net cash provided is not required.)

(c) Using the indirect method, calculate only the net cash flow from operating activities for Chapman

Company for the year ended May 31, 2014.

Comparative balance sheet accounts of Marcus Inc. are presented below.

MARCUS INC.

COMPARATIVE BALANCE SHEET ACCOUNTS

AS OF DECEMBER 31, 2014 AND 2013

December 31

Debit Accounts 2014 2013

Cash $ 42,000 $ 33,750

Accounts Receivable 70,500 60,000

Inventory 30,000 24,000

Investments (available-for-sale) 22,250 38,500

Machinery 30,000 18,750

Buildings 67,500 56,250

Land 7,500 7,500

$269,750 $238,750

Credit Accounts

Allowance for Doubtful Accounts $ 2,250 $ 1,500

Accumulated Depreciation—Machinery 5,625 2,250

Accumulated Depreciation—Buildings 13,500 9,000

Accounts Payable 35,000 24,750

Accrued Payables 3,375 2,625

Long-Term Notes Payable 21,000 31,000

Common Stock, no-par 150,000 125,000

Retained Earnings 39,000 42,625

$269,750 $238,750

Additional data (ignoring taxes):

1. Net income for the year was $42,500.

2. Cash dividends declared and paid during the year were $21,125.

3. A 20% stock dividend was declared during the year. $25,000 of retained earnings was capitalized.

4. Investments that cost $25,000 were sold during the year for $28,750.

5. Machinery that cost $3,750, on which $750 of depreciation had accumulated, was sold for $2,200.

Marcus’s 2014 income statement follows (ignoring taxes).

Sales revenue $540,000

Less: Cost of goods sold 380,000

Gross margin 160,000

Less: Operating expenses (includes $8,625 depreciation and $5,400 bad debts) 120,450

Income from operations 39,550

Other: Gain on sale of investments $3,750

Loss on sale of machinery (800) 2,950

Net income $ 42,500

Instructions

(a) Compute net cash flow from operating activities using the direct method.

(b) Prepare a statement of cash flows using the indirect method.

You have completed the field work in connection with your audit of Alexander Corporation for the year ended December 31, 2014. The balance sheet accounts at the beginning and end of the year are shown below.

Increase

Dec. 31, Dec. 31, or

2014 2013 (Decrease)

Cash $ 277,900 $ 298,000 ($20,100)

Accounts receivable 469,424 353,000 116,424

Inventory 741,700 610,000 131,700

Prepaid expenses 12,000 8,000 4,000

Investment in subsidiary 110,500 –0– 110,500

Cash surrender value of life insurance 2,304 1,800 504

Machinery 207,000 190,000 17,000

Buildings 535,200 407,900 127,300

Land 52,500 52,500 –0–

Patents 69,000 64,000 5,000

Copyrights 40,000 50,000 (10,000)

Bond discount and issue costs 4,502 –0– 4,502

$2,522,030 $2,035,200 $486,830

Income taxes payable $ 90,250 $ 79,600 $ 10,650

Accounts payable 299,280 280,000 19,280

Dividends payable 70,000 –0– 70,000

Bonds payable—8% 125,000 –0– 125,000

Bonds payable—12% –0– 100,000 (100,000)

Allowance for doubtful accounts 35,300 40,000 (4,700)

Accumulated depreciation—buildings 424,000 400,000 24,000

Accumulated depreciation—machinery 173,000 130,000 43,000

Premium on bonds payable –0– 2,400 (2,400)

Common stock—no par 1,176,200 1,453,200 (277,000)

Paid-in capital in excess of par—common stock 109,000 –0– 109,000

Retained earnings—unappropriated 20,000 (450,000) 470,000

$2,522,030 $2,035,200 $486,830

STATEMENT OF RETAINED EARNINGS

FOR THE YEAR ENDED DECEMBER 31, 2014

January 1, 2014 Balance (defi cit) $(450,000)

March 31, 2014 Net income for fi rst quarter of 2014 25,000

April 1, 2014 Transfer from paid-in capital 425,000

Balance –0–

December 31, 2014 Net income for last three quarters of 2014 90,000

Dividend declared—payable January 21, 2015 (70,000)

Balance $ 20,000

Your working papers from the audit contain the following information:

1. On April 1, 2014, the existing deficit was written off against paid-in capital created by reducing the stated value of the no-par stock.

2. On November 1, 2014, 29,600 shares of no-par stock were sold for $257,000. The board of directors voted to regard $5 per share as stated capital.

3. A patent was purchased for $15,000.

4. During the year, machinery that had a cost basis of $16,400 and on which there was accumulated depreciation of $5,200 was sold for $9,000. No other plant assets were sold during the year.

5. The 12%, 20-year bonds were dated and issued on January 2, 2002. Interest was payable on June 30 and December 31. They were sold originally at 106. These bonds were redeemed at 100.9 plus accrued interest on March 31, 2014.

6. The 8%, 40-year bonds were dated January 1, 2014, and were sold on March 31 at 97 plus accrued interest. Interest is payable semiannually on June 30 and December 31. Expense of issuance was $839.

7. Alexander Corporation acquired 70% control in Crimson Company on January 2, 2014, for $100,000.

The income statement of Crimson Company for 2014 shows a net income of $15,000.

8. Extraordinary repairs to buildings of $7,200 were charged to Accumulated Depreciation—Buildings.

9. Interest paid in 2014 was $10,500 and income taxes paid were $34,000.

Instructions

From the information given, prepare a statement of cash flows using the indirect method. A worksheet is not necessary, but the principal computations should be supported by schedules or general ledger accounts. The company uses straight-line amortization for bond interest.