Question: E23-13 (L02,3) (SCF—Direct Method) Brecker Inc., a greeting card company, had the following statements prepared as of December 31, 2017.

BRECKER INC. COMPARATIVE BALANCE SHEET AS OF DECEMBER 31, 2017 AND 2016
	12/31/17	12/31/16
Cash	\(6,000	\)7,000
Accounts receivable	62,000	51,000
Short-term-debt (available for sale)	35,000	18,000
Inventory	40,000	60,000
Prepaid rent	5,000	4,000
Equipment	154,000	130,000
Accumulated depreciation – Equipment	(35,000)	(25,000)
Copyrights	46,000	50,000
Total assets	\(313,000	\)295,000
Account payable	\(46,000	\)40,000
Income tax payable	4,000	6,000
Salaries and wages payable	8,000	4,000
Short-term loans payable	8,000	10,000
Long-term loans payable	60,000	69,000
Common stock, \(10 par	100,000	100,000
Contributed capital, Common stock	30,000	30,000
Retained earnings	57,000	36,000
Total liability and stockholders equity	\)313,000	\(295,000

BRECKER INC. INCOME STATEMENT FOR THE YEAR ENDING DECEMBER 31, 2017
Sales revenue		\)338,150
Cost of goods sold		(175,000)
Gross profit		163,150
Operating expenses		(120,000)
Operating income		43,150
Interest expenses	\(11,400
Gain on sale of equipment	2,000	9,400
Income before taxes		33,750
Income tax expenses		6,750
Net income		\)27,000

Additional information:

1. Dividends in the amount of \(6,000 were declared and paid during 2017.

2. Depreciation expense and amortization expense are included in operating expenses.

3. No unrealized gains or losses have occurred on the investments during the year.

4. Equipment that had a cost of \)20,000 and was 70% depreciated was sold during 2017.

Instructions

Prepare a statement of cash flows using the direct method. (Do not prepare a reconciliation schedule.)

Step by step solution

01

Definition of a statement of cash flow

The schedule prepared by the business entity for providing a summary of all the transactions, including cash payments and receipts, is known as the statement of cash flow.

02

Statement of cash flow using the direct method

Particular	Amount $
Cash collection from the customers	$327,150
Less: Cash payment to suppliers	(149,000)
Less: Cash payment for operating expenses	(89,000)
Less: Cash payment for interest	(11,400)
Less: Income tax expenses	(8,750)
Cash flow from operating activities	$69,000
Cash flow from investing activity:
Sale of equipment	$8,000
Purchase of equipment	(44,000)
Purchase of investment	(17,000)
Net cash used for investing activity	($53,000)
Cash flow from financing activity:
Decrease in long-term loan payable	($9,000)
Decrease in short-term loan payable	(2,000)
Payment of dividend	(6,000)
Cash flow used in financing activity	($17,000)
Net changes in the cash	($1,000)
Opening cash balance	$7,000
Cash balance at end	$6,000

Working note:

Calculation of cash collection from customers:

Particular	Amount $
Sales revenue	$338,150
Less: Increase in receivables	(11,000)
Cash collection from customer	$327,150

Calculation of cash payments to suppliers:

Particular	Amount $
Cost of goods sold	$175,000
Less: increase in account payable	(6,000)
Less: Decrease in inventories	(20,000)
Cash payment to suppliers	$149,000

Calculation payment for operating expenses:

Particular	Amount $
Operating expenses	$120,000
Less: Depreciation expenses$\left[10,000+\left(\$20,000\times 70\%\right)\right]$	(24,000)
Add: Increase in prepaid rent	1,000
Less: Amortization of copyrights	(4,000)
Less: increase in salaries wages and payable	(4,000)
Cash payment for operating expenses	$89,000

Cash payment for income tax:

Particular	Amount $
Income tax expenses	$6,750
Add: Decrease in income tax payable	2,000
Cash paid for income tax expenses	$8,750

Cash from the sale of equipment:

Particular	Amount $
Cost of equipment (30% of $20,000)	$6,000
Gain on sale of equipment	2,000
Cash received on sale	$8,000

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