Comparative balance sheet accounts of Sharpe Company are presented below.

SHARPE COMPANY

COMPARATIVE BALANCE SHEET ACCOUNTS

AS OF DECEMBER 31

Debit Balances 2017 2016

Cash \( 70,000 \) 51,000

Accounts Receivable 155,000 130,000

Inventory 75,000 61,000

Debt investments (available-for-sale) 55,000 85,000

Equipment 70,000 48,000

Buildings 145,000 145,000

Land 40,000 25,000

Totals \(610,000 \)545,000

Credit Balances

Allowance for Doubtful Accounts \( 10,000 \) 8,000

Accumulated Depreciation—Equipment 21,000 14,000

Accumulated Depreciation—Buildings 37,000 28,000

Accounts Payable 66,000 60,000

Income Taxes Payable 12,000 10,000

Long-Term Notes Payable 62,000 70,000

Common Stock 310,000 260,000

Retained Earnings 92,000 95,000

Totals \(610,000 \)545,000

Additional data:

1. Equipment that cost \(10,000 and was 60% depreciated was sold in 2017.

2. Cash dividends were declared and paid during the year.

3. Common stock was issued in exchange for land.

4. Debt investments that cost \)35,000 were sold during the year.

5. There were no write-offs of uncollectible accounts during the year.

Sharpe’s 2017 income statement is as follows.

Sales revenue \(950,000

Less: Cost of goods sold 600,000

Gross profit 350,000

Less: Operating expenses (includes depreciation expense and bad debt expense) 250,000

Income from operations 100,000

Other revenues and expenses Gain on sale of investments \)15,000

Loss on sale of equipment (3,000) 12,000

Income before taxes 112,000

Income taxes 45,000

Net income $ 67,000

Instructions

(a) Compute net cash provided by operating activities under the direct method.

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

Step by step solution

01

Meaning of Cash Flow from Operating Activities

Cash flow from operating activities refers to the flow of Cash related to the business's regular or day-to-day transactions.

02

Computation of net cash provided by operating activities under the direct method

Net cash provided by Operating Activities
	Amount ($)	Amount ($)
Cash receipts from customers (950,000-25,000)		$925,000
Cash Payments:
To suppliers (600,000+14,000-6,000)	608,000
For operating expenses (250,000-22,000-2,000)	226,000
For Income Taxes (45,000-2,000)	43,000	877,000
Net Cash provided by operating activities		$48,000

03

Preparation of the statement of cash flows using the indirect method

Sharpe Company
Statement of cash flows
For the year ended December 31, 2017
Cash flows from operating activities	Amount ($)	Amount ($)
Net Income		$67,000
Adjustment to reconcile net income to net cash provided by operating activities:
Depreciation expense	$22,000
Gain on sale of investments	(15,000)
Loss on sale of equipment	3,000
Increase in accounts receivables (net)	(23,000)
Increase in inventory	(14,000)
Increase in accounts payable	6,000
Increase in income taxes payable	2,000	(19,000)
Net cash provided by operating activities		48,000
Cash flows from Investing activities
Purchase of investments [55,000-(85,000-35,000)]	(5,000)
Purchase of equipment [70,000-(48,000-10,000)]	(32,000)
Sale of investment (35,000 + 15,000)	50,000
Sale of equipment [10,000-(10,000x60%)] – 3,000	1,000
Net cash provided by investing activities		14,000
Cash flows from financing activities
Payments of long-term notes payable	(8,000)
Cash dividends paid [(95,000+67,000)-92,000]	(70,000)
Issuance of common stock (50,000-15000)	35,000
Net cash used by financing activities		(43,000)
Net Increase in cash		$19,000
Cash, January 1, 2017		$51,000
Cash, December 31, 2017		$70,000
Non cash investing and financing activities
Issuance of common stock for land		$15,000

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