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Chapter 14: Q33PGA (page 783)

Preparing the statement of cash flows—indirect method

Accountants for Morganson, Inc. have assembled the following data for the year ended December 31, 2018:

2018 2017 Current Assets: Cash \( 99,400 \) 25,000 Accounts Receivable 64,100 69,700 Merchandise Inventory 83,000 75,000 Current Liabilities: Accounts Payable 57,600 55,200 Income Tax Payable 14,800 16,800

Transaction Data for 2018:

Issuance of common stock for cash \( 38,000

Payment of notes payable \) 46,100

Depreciation expense 24,000

Payment of cash dividends 50,000

Purchase of equipment with cash 74,000

Issuance of notes payable to borrow cash 62,000

Acquisition of land by issuing long-term notes payable 119,000

Gain on sale of building 4,500 Book value of building sold 54,000

Net income 68,500

Prepare Morganton'sstatement of cash flows using the indirect method. Include an accompanying schedule of non-cash investing and financing activities.

Short Answer

Expert verified

Answer

As per the cash flow statement, net change in the cash equals $74,400. And Total Non-cash Investing and financing activities equals $119,000

Step by step solution

01

Statement of cash flows using indirect method

Morganson Inc.

Statement of Cash Flows

For the year ended December 31, 2018


Cash Flows From Operating Activities:


Net Income

$68,500

Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:


Depreciation expense

$24,000

Gain on sale of building

($4,500)

Decrease in account receivables

$5,600

Increase in merchandise inventory

($8,000)

Increase in account payable

$2,400

Decrease in tax payable

($2,000)

Net cash provided/ (used) in operating activities

$86,000

Cash Flows From Investing Activities:


Purchase of equipment

($74,000)

Sale of building

$58,500

Net cash provided/ (used) in investing activities

($15,500)

Cash Flows From Financing Activities:


Issuance of common stock

$38,000

Payment of notes payable

($46,100)

Issue of notes payable

$62,000

Dividend paid

($50,000)

Net cash provided/ (used) in financing activities

$3,900

Net increase/(Decrease) in cash

$74,400

Cash Balance, December 31, 2017

$25,000

Cash Balance, December 31, 2018

$99,400

02

Schedule of non-cash investing and financing activities

Morganson Inc.

Statement of Cash Flows (Partial)

For the year ended December 31, 2018


Non-cash Investing and financing activities


Acquisition of land by issuing long-term notes payable

$119,000

Total Non-cash Investing and financing activities

$119,000

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Most popular questions from this chapter

Classifying cash flow items Consider the following transactions:

  1. Purchased equipment for \(130,000 cash.
  2. Issued \)14 par preferred stock for cash.
  3. Cash received from sales to customers of \(35,000.
  4. Cash paid to vendors, \)17,000.
  5. Sold building for \(19,000 gain for cash.
  6. Purchased treasury stock for \)28,000.
  7. Retired a notes payable with 1,250 shares of the company’s common stock.

Identify the category of the statement of cash flows in which each transaction would be reported.

Preparing the statement of cash flows—direct method

Diversion Rare Coins (DRC) was formed on January 1, 2018. Additional data for the year follow:

a. On January 1, 2018, DRC issued no par common stock for \(450,000.

b. Early in January, DRC made the following cash payments:

1. For store fixtures, \)46,000

2. For merchandise inventory, \(310,000

3. For rent expense on a store building, \)18,000

c. Later in the year, DRC purchased merchandise inventory on account for \(238,000. Before year-end, DRC paid \)138,000 of this accounts payable.

d. During 2018, DRC sold 2,700 units of merchandise inventory for \(400 each. Before year-end, the company collected 85% of this amount. Cost of goods sold for the year was \)340,000, and ending merchandise inventory totaled \(208,000.

e. The store employs three people. The combined annual payroll is \)97,000, of which DRC still owes \(6,000 at year-end.

f. At the end of the year, DRC paid income tax of \)18,000. There was no income taxes payable.

g. Late in 2018, DRC paid cash dividends of $35,000.

h. For store fixtures, DRC uses the straight-line depreciation method, over five years, with zero residual value.

Requirements

1. Prepare DRC’s income statement for the year ended December 31, 2018. Use the single-step format, with all revenues listed together and all expenses listed together.

2. Prepare DRC’s balance sheet at December 31, 2018.

3. Prepare DRC’s statement of cash flows for the year ended December 31, 2018. Format cash flows from operating activities by the direct method

The 2018 income statement and comparative balance sheet of Sweet Valley, Inc. follow:

Additionally, Sweet Valley purchased land of \(20,900 by financing it 100% with long-term notes payable during 2018. During the year, there were no sales of land, no retirements of stock, and no treasury stock transactions. A plant asset was disposed of for \)0. The cost and the accumulated depreciation of the disposed asset was $13,240. Plant asset was acquired for cash.

Requirements

1. Prepare the 2018 statement of cash flows, formatting operating activities by the indirect method.

2. How will what you learned in this problem help you evaluate an investment?

Using a spreadsheet to prepare the statement of cash flows— indirect method The 2018 comparative balance sheet and income statement of Attleboro Group, Inc. follow. Attleboro disposed of a plant asset at book value in 2018.

Prepare the spreadsheet for the 2018 statement of cash flows. Format cash flows from operating activities by the indirect method. A plant asset was disposed of for \(0. The cost and accumulated depreciation of the disposed asset was \)13,600. There were no sales of land, no retirement of common stock, and no treasury stock transactions. Assume plant asset and land acquisitions were for cash.

Question: What is free cash flow, and how is it calculated?
See all solutions

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