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Chapter 23: Q6P (page 1387)

Question:Comparative balance sheet accounts of Marcus Inc. are presented below.

MARCUS INC.

COMPARATIVE BALANCE SHEET ACCOUNTS

AS OF DECEMBER 31, 2017 AND 2016

December 31

2017 2016

Debit Accounts

Cash \( 42,000 \) 33,750

Accounts Receivable 70,500 60,000

Inventory 30,000 24,000

Equity investments 22,250 38,500

Machinery 30,000 18,750

Buildings 67,500 56,250

Land 7,500 7,500

\(269,750 \)238,750

Credit Accounts

Allowance for Doubtful Accounts \( 2,250 \) 1,500

Accumulated Depreciation—Machinery 5,625 2,250

Accumulated Depreciation—Buildings 13,500 9,000

Accounts Payable 35,000 24,750

Accrued Payables 3,375 2,625

Long-Term Notes Payable 21,000 31,000

Common Stock, no-par 150,000 125,000

Retained Earnings 39,000 42,625

\(269,750 \)238,750

Additional data (ignoring taxes):

1. Net income for the year was \(42,500.

2. Cash dividends declared and paid during the year were \)21,125.

3. A 20% stock dividend was declared during the year. \(25,000 of retained earnings was capitalized.

4. Equity investments (level of ownership is less than 20%) that cost \)25,000 were sold during the year for \(28,750. No unrealized gains and losses were recorded on these investments in 2017.

5. Machinery that cost \)3,750, on which \(750 of depreciation had accumulated, was sold for \)2,200. Marcus’s 2017 income statement follows (ignoring taxes).

Sales revenue \(540,000

Less: Cost of goods sold 380,000

Gross margin 160,000

Less: Operating expenses (includes \)8,625 depreciation and \(5,400 bad debts) 120,450

Income from operations 39,550

Other: Gain on sale of investments \)3,750

Loss on sale of machinery (800) 2,950

Net income $ 42,500

Instructions

  1. Compute net cash flow from operating activities using the direct method.

(b) Prepare a statement of cash flows using the indirect method.

Short Answer

Expert verified

Answer

  1. Cash flow from operating activities using the direct method is computed as $43,425
  2. The required statement of cash flow is prepared using the indirect method, and the net increase in cash is $8,250

Step by step solution

01

Meaning of Cash Flow from Investing Activities

Cash flow from investing activities refers to those activities that include the cash inflow and outflow related to the sale and purchase of non-current assets and long-term investments.

02

Computation of cash flows from operating activities using the direct method

Marcus Inc
Statement of cash flows
For the year ended December 31, 2017

Amount ($)

Amount ($)

Cash flows from operating activities

Cash received from customers (540,000 – 10,500 – 4,650)

524,850

Cash Payments:

To Suppliers (380,000 + 6,000 – 10,250)

375,750

For operating expenses (120,450 – 8,625 – 750)

105,675

481,425

Net cash provided by operating activities

43,425

03

Preparation of the statement of cash flows using the indirect method

Marcus Inc.
Statement of cash flows
For the year ended December 31, 2017

Cash flows from operating activities

Amount ($)

Amount ($)

Net Income

42,500

Adjustment to reconcile net income to net cash provided by operating activities:

Depreciation expense

8,625

Gain on sale of investments

(3,750)

Loss on sale of machinery

800

Increase in accounts receivables (net)

(9,750)

Increase in inventory

(6,000)

Increase in accounts payable

10,250

Increase in accrued payable

750

925

Net cash provided by operating activities

43,425

Cash flows from Investing activities

Purchase of investments [22,250-(38,500-25,000)]

(8,750)

Purchase of machinery [30,000-(18,750-3,750)]

(15,000)

Sale of investment

28,750

Sale of equipment

2,200

Addition to buildings

(11,250)

Net cash provided by investing activities

(4,050)

Cash flows from financing activities

Payments of long-term notes payable

(10,000)

Cash dividends paid

(21,125)

Net cash used by financing activities

(31,125)

Net Increase in cash

8,250

Cash, January 1, 2017

33,750

Cash, December 31, 2017

42,000

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Most popular questions from this chapter

Question: Stan Conner and Mark Stein were discussing the presentation format of the statement of cash flows of Bombeck Co. At the bottom of Bombeck’s statement of cash flows was a separate section entitled “Noncash investing and financing activities.” Give three examples of significant noncash transactions that would be reported in this section.

The balance sheet data of Brown Company at the end of 2017 and 2016 follow.

2017 2016

Cash \( 30,000 \) 35,000

Accounts receivable (net) 55,000 45,000

Inventory 65,000 45,000

Prepaid expenses 15,000 25,000

Equipment 90,000 75,000

Accumulated depreciation—equipment (18,000) (8,000)

Land 70,000 40,000

\(307,000 \)257,000

Accounts payable \( 65,000 \) 52,000

Accrued expenses 15,000 18,000

Notes payable—bank, long-term –0– 23,000

Bonds payable 30,000 – 0–

Common stock, \(10 par 189,000 159,000

Retained earnings 8,000 5,000

\)307,000 \(257,000

Land was acquired for \)30,000 in exchange for common stock, par \(30,000, during the year; all equipment purchased was for cash. Equipment costing \)10,000 was sold for \(3,000; book value of the equipment was \)6,000. Cash dividends of $10,000 were declared and paid during the year.

Instructions

Compute net cash provided (used) by:

(a) Operating activities.

(b) Investing activities.

(c) Financing activities.

Question:(SCF—Indirect Method) The following are Sullivan Corp.’s comparative balance sheet accounts at December 31, 2017 and 2016, with a column showing the increase (decrease) from 2016 to 2017.

Comparative Balance Sheet

2017

2016

Increase (Decrease)

Cash

\(815,000

\)700,000

\(115,000

Accounts receivable

1,128,000

1,168,000

(40,000)

Inventory

1,850,000

1,715,000

135,000

Property, plant and equipment

3,307,000

2,967,000

340,000

Accumulated depreciation

(1,165,000)

(1,040,000)

(125,000)

Investment in Myers Co

310,000

275,000

35,000

Loan receivable

250,000

-

250,000

Total assets

\)6,495,000

\(5,785,000

\)710,000

Account payable

\(1,015,000

\)955,000

\(60,000

Income taxes payable

30,000

50,000

(20,000)

Dividend payable

800,000

100,000

(20,000)

Lease liability

400,000

-

400,000

Common stock, \) 1 par value

500,000

500,000

0

Paid-in-capital in excess of par – common stock

1,500,000

1,500,000

0

Retained earnings

2,970,000

2,680,000

290,000

Total liabilities and stockholders equity

\(6,495,000

\)5,785,000

\(710,000

Additional information:

1. On December 31, 2016, Sullivan acquired 25% of Myers Co.’s common stock for \)275,000. On that date, the carrying value of Myers’s assets and liabilities, which approximated their fair values, was \(1,100,000. Myers reported income of \)140,000 for the year ended December 31, 2017. No dividend was paid on Myers’s common stock during the year.

2. During 2017, Sullivan loaned \(300,000 to TLC Co., an unrelated company. TLC made the first semi-annual principal repayment of \)50,000, plus interest at 10%, on December 31, 2017.

3. On January 2, 2017, Sullivan sold equipment costing \(60,000, with a carrying amount of \)38,000, for \(40,000 cash.

4. On December 31, 2017, Sullivan entered into a capital lease for an office building. The present value of the annual rental payments is \)400,000, which equals the fair value of the building. Sullivan made the first rental payment of \(60,000 when due on January 2, 2018.

5. Net income for 2017 was \)370,000.

6. Sullivan declared and paid the following cash dividends for 2017 and 2016.

2017

2016

Declared

December 15, 2017

December 15, 2016

Paid

February 28, 2018

February 28, 2018

Amount

\(80,000

\)100,000

Instructions

Prepare a statement of cash flows for Sullivan Corp. for the year ended December 31, 2017, using the indirect method.

Colbert Corporation had the following 2017 income statement.

Revenues \(100,000

Expenses 60,000

\) 40,000

In 2017, Colbert had the following activity in selected accounts.

Accounts Receivable Doubtful Accounts 1/1/17 20,000 1,200 1/1/17 Revenues 100,000 1,000 Write-offs Write-offs 1,000 1,840 Bad debt expense 90,000 Collections 12/31/17 29,000 2,040 12/31/17

Prepare Colbert’s cash flows from the operating activities section of the statement of cash flows using

(a) the direct method and

(b) the indirect method.

Accounting, Analysis, and Principles The income statement for the year ended December 31, 2017, for Laskowski Manufacturing Company contains the following condensed information.

LASKOWSKI CO.

INCOME STATEMENT


Revenues

\(6,583,000

Operating expenses (excluding depreciation) \)4,920,000

Depreciation expense 880,000

5,800,000

Income before income tax

783,000

Income tax expense

353,000

Net income

\( 430,000

Included in operating expenses is a \)24,000 loss resulting from the sale of machinery for \(270,000 cash. The company purchased machinery at the cost of \)750,000.

Laskowski reports the following balances on its comparative balance sheets on December 31.


LASKOWSKI CO.

COMPARATIVE BALANCE SHEETS (PARTIAL)

2017

2016

Cash

\(672,000

\)130,000

Accounts receivable

775,000

610,000

Inventory

834,000

867,000

Accounts payable

521,000

501,000

Income tax expense of \(353,000 represents the amount paid in 2017. Dividends declared and paid in 2017 totalled \)200,000.

Accounting

Prepare the statement of cash flows using the indirect method.

Analysis

Laskowski has an aggressive growth plan, which will require significant investments in plant and equipment over the next several years. Preliminary plans call for an investment of over $500,000 in the next year. Compute Laskowski’s free cash flow (from Chapter 5) and use it to evaluate the investment plans with the use of only internally generated funds.

Principles

How does the statement of cash flows contribute to achieving the objective of financial reporting?
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