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.

Step by step solution

01

Meaning of Cash Flow Statement

A cash flow statement is a statement that shows the flows of Cash and cash equivalents that are inflows and outflows for a period and is prepared at the end of the accounting period.

02

Step 2:Difference between direct and indirect method

In generating a statement of cash flows in accordance with GAAP, both the direct and indirect methods for reporting cash flows from operating activities are appropriate; nevertheless, the FASB promotes the use of the direct approach. The statement of cash flows' main benefit under the direct method may be that it provides more information while reporting the main categories of Cash received and disbursements. The indirect approach converts accrual-basis net income to cash-basis net income by adding or subtracting non-cash items included in net income, creating a useful connection between the statement of cash flows and the income statement, balance sheet, and other financial statements.

03

Preparation of the statement of cash flows using direct method

Chapman Company
Statement of cash flows
For the year ended December 31, 2017
	Amount ($)	Amount ($)
Cash flows from operating activities
Cash received from customers (1,255,250 – 17,000)		$1,238,250
Cash Payments:
To Suppliers (722,000 – 30,000 –8,000)	$684,000
To Employees (252,100 + 24,750)	276,850
For other expenses (8,150 + 2,000)	10,150
For interest (75,000 – 2,000)	73,000
For Income taxes	43,000	(1,087,000)
Net cash provided by operating activities		151,250
Cash flows from Investing activities
Purchase of plant assets		(28,000)
Cash flows from financing activities
Payments of long-term notes payable	(30,000)
Cash dividends paid	(105,000)
Issuance of common stock	20,000
Net cash used by financing activities		(115,000)
Net Increase in cash		$8,250
Cash, January 1, 2017		$20,000
Cash, December 31, 2017		$28,250

04

Computation of cash flows from operating activities using indirect method

Chapman Company
Statement of cash flows
For the year ended December 31, 2017
	Amount ($)	Amount ($)
Cash flows from operating activities
Net Income		$130,000
Adjustment to reconcile net income to net cash provided by operating activities:
Depreciation expense	$25,000
Decrease in salaries and wages payable	(24,750)
Increase in prepaid expenses	(2,000)
Increase in accounts receivables (net)	(17,000)
Decrease in inventory	30,000
Increase in accounts payable	8,000
Increase in interest payable	2,000	21,250
Net cash provided by operating activities		$151,250

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