Chapter 14: Q39PGB (page 788)

Classic Rare Coins (CRC) was formed on January 1, 2018. Additional data for the year follow:
a. On January 1, 2018, CRC issued no-par common stock for $525,000.
b. Early in January, CRC made the following cash payments:
1. For store fixtures, $51,000
2. For merchandise inventory, $240,000
3. For rent expense on a store building, $18,000
c. Later in the year, CRC purchased merchandise inventory on account for $243,000. Before year-end, CRC paid $153,000 of these accounts payable.
d. During 2018, CRC sold 2,800 units of merchandise inventory for $325 each. Before year-end, the company collected 95% of this amount. Cost of goods sold for the year was $290,000, and ending merchandise inventory totaled $193,000.
e. The store employs three people. The combined annual payroll is $82,000, of which CRC still owes $5,000 at year-end.
f. At the end of the year, CRC paid income tax of $17,000. There were no income taxes payable.
g. Late in 2018, CRC paid cash dividends of $38,000.
h. For store fixtures, CRC uses the straight-line depreciation method, over five years, with zero residual value.
Requirements
1. What is the purpose of the statement of cash flows?
2. Prepare CRC’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.
3. Prepare CRC’s balance sheet at December 31, 2018.
4. Prepare CRC’s statement of cash flows using the indirect method for the year ended December 31, 2018.

Short Answer

Expert verified

Preparing a cash flow statement is to know the exact details of cash receipts and payments.
Net income for the year ended December 31, 2018, is $492,800.
Total Assets equals $1,074,800 and Total Liabilities and shareholders’’ equity equals $1,074,800.
Net cash flow for the year ended December 31, 2018, is $795,500

Step by step solution

The purpose of the statement of cash flows

The purpose of the cash flow statement is to identify the entity’s cash inflow and cash outflow. It provides a detailed picture of the entity, that helps the reader to understand more and clearly. It helps the investors to identify whether the entity is cash generating or not. Inflows and outflows are further classified into operating, investing, and financing activities. An entity can also get a clear view of the funds available for future growth.

Income statement for the year ended December 31, 2018

Classic Rare Coins Income Statement For the year ended December 31, 2018
Revenues
Sales revenue (2,800 x $325)	$910,000
Expenses:
Cost of goods sold	$290,000
Depreciation ($51,000 / 5)	$10,200
Other operating expense ($82,000+$18,000)	$100,000
Income tax	$17,000
Net Income	$492,800

Balance sheet at December 31, 2018

Classic Rare Coins Balance Sheet For the year ended December 31, 2018
Assets:
Store Fixtures net	$40,800
Account Receivables	$45,500
Cash	$795,500
Merchandise Inventory	$193,000
Total	$1,074,800
Common stock	$525,000
Retained earnings ($492,800-$38,000)	$454,800
Account payable	$90,000
Accrued liabilities	$5,000
Total	$1,074,800

Statement of cash flows using the indirect method

Classic Rare Coins Balance Sheet For the year ended December 31, 2018
Cash Flows From Operating Activities:
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Net Income	$492,800
Depreciation expense	$10,200
Increase in account receivables	($45,500)
Increase in merchandise inventory	($193,000)
Increase in account payable	$90,000
Increase in accrued liabilities	$5,000
Net cash provided/ (used) in operating activities	$359,500
Cash Flows From Investing Activities:
Purchase of store fixtures	($51,000)
Net cash provided/ (used) in investing activities	($51,000)
Cash Flows From Financing Activities:
Issuance of common stock	$525,000
Dividend paid	($38,000)
Net cash provided/ (used) in financing activities	$487,000
Net change in cash	$795,500