Chapman Company, a major retailer of bicycles and accessories, operates several stores and is a publicly traded company. The comparative balance sheet
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.
\r\nCHAPMAN COMPANY
\r\nCOMPARATIVE BALANCE SHEET
\r\nAS OF MAY 31
\r\n2014 2013
\r\nCurrent assets
\r\nCash $ 28,250 $ 20,000
\r\nAccounts receivable 75,000 58,000
\r\nInventory 220,000 250,000
\r\nPrepaid expenses 9,000 7,000
\r\nTotal current assets 332,250 335,000
\r\nPlant assets
\r\nPlant assets 600,000 502,000
\r\nLess: Accumulated depreciation—plant assets 150,000 125,000
\r\nNet plant assets 450,000 377,000
\r\nTotal assets $782,250 $712,000
\r\nCurrent liabilities
\r\nAccounts payable $123,000 $115,000
\r\nSalaries and wages payable 47,250 72,000
\r\nInterest payable 27,000 25,000
\r\nTotal current liabilities 197,250 212,000
\r\nLong-term debt
\r\nBonds payable 70,000 100,000
\r\nTotal liabilities 267,250 312,000
\r\nStockholders’ equity
\r\nCommon stock, $10 par 370,000 280,000
\r\nRetained earnings 145,000 120,000
\r\nTotal stockholders’ equity 515,000 400,000
\r\nTotal liabilities and stockholders’ equity $782,250 $712,000
\r\nCHAPMAN COMPANY
\r\nINCOME STATEMENT
\r\nFOR THE YEAR ENDED MAY 31, 2014
\r\nSales revenue $1,255,250
\r\nCost of goods sold 722,000
\r\nGross profi t 533,250
\r\nExpenses
\r\nSalaries and wages expense 252,100
\r\nInterest expense 75,000
\r\nDepreciation expense 25,000
\r\nOther expenses 8,150
\r\nTotal expenses 360,250
\r\nOperating income 173,000
\r\nIncome tax expense 43,000
\r\nNet income $ 130,000
\r\nThe following is additional information concerning Chapman’s transactions during the year ended
\r\nMay 31, 2014.
\r\n1. All sales during the year were made on account.
\r\n2. All merchandise was purchased on account, comprising the total accounts payable account.
\r\n3. Plant assets costing $98,000 were purchased by paying $28,000 in cash and issuing 7,000 shares of stock.
\r\n4. The “other expenses” are related to prepaid items.
\r\n5. All income taxes incurred during the year were paid during the year.
\r\n6. In order to supplement its cash, Chapman issued 2,000 shares of common stock at par value.
\r\n7. Cash dividends of $105,000 were declared and paid at the end of the fiscal year.
\r\nInstructions
\r\n(a) Compare and contrast the direct method and the indirect method for reporting cash flows from operating activities.
\r\n(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.)
\r\n(c) Using the indirect method, calculate only the net cash flow from operating activities for Chapman
\r\nCompany for the year ended May 31, 2014.