Chapter 14: Q4TI (page 758)

Question: Big Island, Inc. began 2018 with cash of $40,000. During the year, Big Island earned revenue of $200,000 and collected $120,000 from customers. Expenses for the year totaled $160,000, of which Big Island paid $65,000 in cash to suppliers and $80,000 in cash to employees. The company received $2,000 cash for interest revenue and paid $10,000 for income taxes. Big Island also paid $35,000 to purchase equipment and a cash dividend of $15,000 to its stockholders during 2018. Prepare the company’s operating activities section of the statement of cash flows for the year ended December 31, 2018. Use the direct method.

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Answer

Net Cash used by operating activities is ($33,000)

Step by step solution

Cash paid to purchase equipment is an investing activity and dividend paid to stockholders is a financing activity.

Particulars	Amount ($)	Amount($)
Cash Flows from Operating Activities
Receipts:
Collection from customers	120,000
Interest revenue	2,000	122,000
Payments:
To suppliers	(65,000)
To Employees	(80,000)
For Income tax	(10,000)	(155,000)
Net cash used by operating activities		(33,000)

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ROUSE EXERCISE EQUIPMENT, INC. Income statement Year ended December 31, 2018
Net sales revenue	\(713,000
Cost of goods sold	342,000
Gross Profit	371,000
Operating expense:
Depreciation expense	54,000
Other operatin expenses	210,000
Net Income	\)107,000

ROUSE EXERCISE EQUIPMENT, INC. Comparative Balance sheet December 31, 2018 and 2017
	2018	2017
Assets
Current assets:
Cash	17,000	16,000
Accounts receivable	57,000	46,000
Merchandise inventory	79,000	90,000
Long term assets:
Plant assets	260,500	216,400
Accumulated depreciation-Plant assets	(38,500)	(32,400)
Investments	96,000	73,000
Total assets	\(471,000	\)409,000

Liabilities
Current liabilities
Accounts payable	72,000	71,000
Salaries payable	3,000	5,000
Long-term liabilities
Notes payable	61,000	69,000
Total liabilities	136,000	145,000

Stockholder’s equity
Common stock, no par	45,000	34,000
Retained earnings	290,000	230,000
Total stockholder’s equity	335,000	264,000
Total liabilities and stockholder’s equity	\(471,000	\)409,000