Question: Michaels Company had available at the end of 2017 the following information.

MICHAELS COMPANY COMPARATIVE BALANCE SHEETS AS OF DECEMBER 31, 2017 AND 2016
	2017	2016
Cash	\(10,000	\)4,000
Accounts receivable	20,500	12,950
Short-term investments	22,000	30,000
Inventory	42,000	35,000
Prepaid rent	3,000	12,000
Prepaid insurance	2,100	900
Supplies	1,000	750
Land	125,000	175,000
Building	350,000	350,000
Accumulated depreciation – building	(105,000)	(87,500)
Equipment	525,000	400,000
Accumulated depreciation – equipment	(130,000)	(112,000)
Patents	45,000	50,000
Total assets	\(910,600	\)871,100
Account payable	\(22,000	\)32,000
Income tax payable	5,000	4,000
Salaries and wages payable	5,000	3,000
Short-term note payable	10,000	10,000
Long-term note payable	60,000	70,000
Bond payable	400,000	400,000
Premium on bond payable	20,303	25,853
Common stock	240,000	220,000
Paid-in-capital in excess of par – common stock	25,000	17,500
Retained earnings	123,297	88,747
Total liabilities and stockholders equity	\(910,600	\)871,100

MICHAELS COMPANY INCOME STATEMENT AND DIVIDEND INFORMATION FOR THE YEAR ENDED DECEMBER 31, 2017
Sales revenue		\(1,160,000
Cost of goods sold		748,000
Gross margin		412,000
Operating expenses
Selling expenses	\)79,200
Administrative expenses	156,700
Depreciation/Amortization expenses	40,500
Total operating expenses		276,400
Income from operations		135,600
Other revenue/expenses
Gain on sale of land	8,000
Gain on sale of short-term investment	4,000
Dividend revenue	2,400
Interest expenses	(51,750)	(37,350)
Income before tax		98,250
Income tax expenses		39,400
Net income		58,850
Dividend to common stockholders		(24,300)
To Retained earnings		$34,550

Instructions

Prepare a statement of cash flows for Michaels Company using the direct method accompanied by a reconciliation schedule. Assume the short-term investments are debt securities, classified as available-for-sale

Step by step solution

01

Definition of Cash flow Statement

A cash flow statement is a summary of the cash inflows and outflows that occurred during a specific period. This summary of inflows and outflows is prepared in three sections; investing, financing, and operating.

02

Statement of cash flow using the direct method

Particular	Amount $	Amount $
Cash from customer		$1,152,450
Dividend income		2,400
Cash paid:
Suppliers	$765,000
Operating expenses	226,350
Taxes	38,400
Interest	57,300	(1,087,050)
Net cash provided by operating activities		$67,800
Cash flow from investing activities
Sale of short-term investment$\left(\$8,000+\$4,000\right)$	$12,000
Sale of land$\left(\$50,000+\$8,000\right)$	58,000
Purchase equipment	(125,000)
Net cash used by investing activities		($55,000)
Cash flow from financing activities
Proceed from issuance of common stock$\left(\$20,000+\$7,500\right)$	27,500
Principal payment of long-term debt	(10,000)
Dividend payment	(24,300)
Cash used in financing activities		($6,800)
Net changes in cash		$6,000
Add: Opening cash balance		4,000
Ending cash balance		$10,000

Working note:

1. Cash received from customers

Particular	Amount $
Sales revenue	$1,160,000
Less: Increase in accounts receivables$\mathbf{(}\mathbf{\$}\mathbf{20}\mathbf{,}\mathbf{000}\mathbf{+}\mathbf{\$}\mathbf{12}\mathbf{,}\mathbf{950}\mathbf{)}$	(7,550)
Cash received from customer	$1,152,450

1. Cash paid to suppliers:

Particular	Amount $
Cost of goods sold	$748,000
Add: Increase in inventory $\mathbf{(}\mathbf{\$}\mathbf{42}\mathbf{,}\mathbf{000}\mathbf{+}\mathbf{\$}\mathbf{35}\mathbf{,}\mathbf{000}\mathbf{)}$	7,000
Add: Decrease in accounts payable$\mathbf{(}\mathbf{\$}\mathbf{32}\mathbf{,}\mathbf{000}\mathbf{+}\mathbf{\$}\mathbf{22}\mathbf{,}\mathbf{000}\mathbf{)}$	10,000
Cash received from customer	$765,000

1. Calculation of cash paid for operating expenses:

Particular	Amount $
Operating expenses	$276,400
Less: depreciation/amortization expenses	(40,500)
Less: Decrease in prepaid rent	(9,000)
Less: Increase in salaries and wages payable	(2,000)
Add: Increase in supplies	250
Add: Increase in prepaid insurance	1,200
Cash paid for operating expenses	$226,350

1. Calculation of cash paid for taxes:

Particular	Amount $
Income tax expenses	$39,400
Less: Increase in income tax payable$\mathbf{(}\mathbf{\$}\mathbf{5}\mathbf{,}\mathbf{000}\mathbf{+}\mathbf{\$}\mathbf{4}\mathbf{,}\mathbf{000}\mathbf{)}$	1,000
Cash paid for taxes	$38,400

1. Calculation of cash paid for interest:

Particular	Amount $
Interest expenses	$51,750
Add: decrease in premium on bond payable$\mathbf{(}\mathbf{\$}\mathbf{25}\mathbf{,}\mathbf{853}\mathbf{+}\mathbf{\$}\mathbf{20}\mathbf{,}\mathbf{303}\mathbf{)}$	5,550
Cash paid for taxes	$57,300

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