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Chapter 23: Q4BE (page 1373)

Bloom Corporation had the following 2017 income statement.

Sales revenue

\(200,000

Cost of goods sold

120,000

Gross profit

80,000

Operating expenses (including depreciation of \)21,000)

50,000

Net income

\(30,000

The following accounts increased during 2017: Accounts Receivable \)12,000, Inventory \(11,000, and Accounts Payable \)13,000. Prepare the cash flows from the operating activities section of Bloom’s 2017 statement of cash flows using the direct method.

Short Answer

Expert verified

Cash flow from operations is$335,000.

Step by step solution

01

Definition of Direct Method

Under the direct method of cash flow statement, the business entity reports the cash receipts from operations and cash disbursed in the operation for determining the cash flow from the operation.

02

Statement of cash flow using the direct method

Particular

Amount $

Cash from sales

$188,000

Cash payment to suppliers

$118,000

Cash payment for operating expenses

$29,000

Cash flow from operations

$335,000

Working note:

Cash from sales:

Particular

Amount $

Sales revenue

$200,000

Less: Increase in accounts receivables

(12,000)

Cash from sales

$188,000

Cash payment to suppliers:

Particular

Amount $

Cost of goods sold

$120,000

Add: Increase in inventory

$11,000

Purchases

$131,000

Less: Increase in accounts payable

(13,000)

Cash payment to suppliers

$118,000

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Most popular questions from this chapter

Stansfield Corporation had the following activities in 2017.

1. Payment of accounts payable \(770,000.

4. Collection of note receivable \)100,000.

2. Issuance of common stock \(250,000.

5. Issuance of bonds payable \)510,000.

3. Payment of dividends \(350,000.

6. Purchase of treasury stock \)46,000.

Compute the amount Stansfield should report as net cash provided (used) by financing activities in its 2017 statement of cash flows.

Novak Corporation is preparing its 2017 statement of cash flows, using the indirect method. Presented below is a list of items that may affect the statement. Using the code below, indicate how each item will affect Novak’s 2017 statement of cash flows.

Code Letter Effect

A Added to net income in the operating section

D Deducted from net income in the operating section

R-I Cash receipt in investing section

P-I Cash payment in investing section

R-F Cash receipt in financing section

P-F Cash payment in financing section

N Noncash investing and financing activity

(a)Purchase of land and building

(b)Decrease in accounts receivable

(c)Issuance of stock.

(d)Depreciation expense.

(e)Sale of land at book value.

(f)Sale of land at a gain.

(g)Payment of dividends.

(h)Increase in accounts receivable.

(i)Purchase of available-for-sale debt investment

(j)Increase in accounts payable.

(k)Decrease in accounts payable.

(l)Loan from bank by signing note

(m)Purchase of equipment using a note

(n)Increase in inventory

(o)Issuance of bonds.

(p)Redemption of bonds payable.

(q)Sale of equipment at a loss.

(r)Purchase of treasury stock.

Question: (SCF Theory and Analysis of Improper SCF) Teresa Ramirez and Lenny Traylor are examining the following statement of cash flows for Pacific Clothing Store’s first year of operations.


PACIFIC CLOTHING STORE

STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED JANUARY 31, 2017

Sources of cash

From sales of merchandise

\(382,000

From sale of common stock

380,000

From sale of investment

120,000

From depreciation

80,000

From issuance of note for truck

30,000

From interest on investments

8,000

Total sources of cash

1,000,000

Uses of cash

For purchase of fixtures and equipment

330,000

For merchandise purchased for resale

253,000

For operating expenses (including depreciation)

170,000

For purchase of investment

95,000

For purchase of truck by issuance of note

30,000

For purchase of treasury stock

10,000

For interest on note

3,000

Total uses of cash

891,000

Net increase in cash

\)109,000

Teresa claims that Pacific’s statement of cash flows is an excellent portrayal of a superb first year, with cash increasing \(109,000. Lenny replies that it was not a superb first year—that the year was an operating failure, the statement was incorrectly presented, and \)109,000 is not the actual increase in cash.

Instructions

(a) With whom do you agree, Teresa or Lenny? Explain your position.

(b) Using the data provided, prepare a statement of cash flows in proper indirect method form. The only noncash items in income are depreciation and the gain from the sale of the investment (purchase and sale are related).

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, 2017, are as follows. The company is preparing its statement of cash flows.

CHAPMAN COMPANY

COMPARATIVE BALANCE SHEET

AS OF MAY 31

2017 2016

Current assets Cash \( 28,250 \) 20,000

Accounts receivable 75,000 58,000

Inventory 220,000 250,000

Prepaid expenses 9,000 7,000

Total current assets 332,250 335,000

Plant assets

Plant assets 600,000 502,000

Less: Accumulated depreciation—plant assets 150,000 125,000

Net plant assets 450,000 377,000

Total assets \(782,250 \)712,000

Current liabilities

Accounts payable \(123,000 \)115,000

Salaries and wages payable 47,250 72,000

Interest payable 27,000 25,000

Total current liabilities 197,250 212,000

Long-term debt

Bonds payable 70,000 100,000

Total liabilities 267,250 312,000

Stockholders’ equity

Common stock, \(10 par 370,000 280,000

Retained earnings 145,000 120,000

Total stockholders’ equity 515,000 400,000

Total liabilities and stockholders’ equity \)782,250 \(712,000

CHAPMAN COMPANY

INCOME STATEMENT

FOR THE YEAR ENDED MAY 31, 2017

Sales revenue \)1,255,250

Cost of goods sold 722,000

Gross profit 533,250

Expenses Salaries and wages expense 252,100

Interest expense 75,000

Depreciation expense 25,000

Other expenses 8,150

Total expenses 360,250

Operating income 173,000

Income tax expense 43,000

Net income \( 130,000

The following is additional information concerning Chapman’s transactions during the year ended May 31, 2017.

1. All sales during the year were made on account.

2. All merchandise was purchased on account, comprising the total accounts payable account.

3. Plant assets costing \)98,000 were purchased by paying \(28,000 in cash and issuing 7,000 shares of stock.

4. The “other expenses” are related to prepaid items.

5. All income taxes incurred during the year were paid during the year.

6. In order to supplement its cash, Chapman issued 2,000 shares of common stock at par value.

7. Cash dividends of \)105,000 were declared and paid at the end of the fiscal year.

Instructions

(a) Compare and contrast the direct method and the indirect method for reporting cash flows from operating activities.

(b) Prepare a statement of cash flows for Chapman Company for the year ended May 31, 2017, 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.)

(c) Using the indirect method, calculate only the net cash flow from operating activities for Chapman Company for the year ended May 31, 2017.

Differentiate between investing activities, financing activities, and operating activities.
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