Prepared By: Md.

Toufiq Hasan (24th Batch, AIS, RU)

E23-3 (Preparation of Operating Activities Section-Indirect Method, Periodic

Inventory) The income statement of Vince Gill Company is shown below.
—————————————————————————————————
VINCE GILL COMPANY
INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2014
—————————————————————————————————
Sales revenue $69,00,000
Cost of goods sold
Beginning inventory $19,00,000
Purchases $44,00,000
——————
Goods available for sale $63,00,000
Ending inventory $16,00,000
——————
Cost of goods sold $47,00,000
——————
Gross profit $22,00,000
Operating expenses
Selling expenses $450,000
Administrative expenses $700,000
——————
$11,50,000
——————
Net income $1,050,000

Additional information:
1. Accounts receivable decreased $360,000 during the year.
2. Prepaid expenses increased $170,000 during the year.
3. Accounts payable to suppliers of merchandise decreased $275,000 during
the year.
4. Accrued expenses payable decreased $100,000 during the year.
5. Administrative expenses include depreciation expense of $60,000.

Instructions
Prepare the operating activities section of the statement of cash flows for the year
ended December 31, 2014, for Vince Gill Company, using the indirect method.

1
 Prepared By: Md. Toufiq Hasan (24th Batch, AIS, RU)

Solution:
VINCE GILL COMPANY
Partial Statement of Cash Flows
FOR THE YEAR ENDED DECEMBER 31, 2014
—————————————————————————————————
Particulars
$ $
———————————
————— —————
——————
Cash flows from operating
activities
Net Income 10,50,000
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation Expense (5) 60,000
Decrease in Accounts
360,000
receivable (1)
Increase in prepaid
(170,000)
expenses (2)
Decrease in accounts
(275,000)
payable (3)
Decrease in accrued
(100,000)
expenses payable (4)
Decrease in inventory
300,000
(W-1)
—————
175,000
————
Net Cash Provided by
$12,25,000
Operating Activities
—————————————————————————————————

Workings:

1. Beginning inventory 19,00,000

Ending inventory 16,00,000
—————————————————
Decrease inventory 300,000

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 Prepared By: Md. Toufiq Hasan (24th Batch, AIS, RU)

E23-6 (Preparation of Operating Activities Section - Indirect Method) Krauss

Company's income statement for the year ended December 31, 2014, contained the
following condensed information.

Service revenue $840,000

Operating expenses (excluding depreciation) $624,000
Depreciation expense 60,000
Loss on sale of equipment 26,000
————— 710,000
—————
Income before income taxes 130,000
Income tax expense 40,000
—————
Net income $90,000

Krauss’s balance sheet contained the following comparative data at December 31.

2014 2013
Accounts receivable $37,000 $54,000
Accounts payable 41,000 31,000
Income taxes payable 4,000 8,500
(Accounts payable pertains to operating expenses.)

Instructions
Prepare the operating activities section of the statement of cash flows using the
indirect method.

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 Prepared By: Md. Toufiq Hasan (24th Batch, AIS, RU)

Solution:
KRAUSS COMPANY
Statement of Cash Flows (Partial )
FOR THE YEAR ENDED DECEMBER 31, 2014
—————————————————————————————————
Particulars
$ $
———————————
————— —————
——————
Cash flows from operating
activities
Net Income 90,000
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation Expenses 60,000
Loss on sale of
26,000
equipment
Decrease in accounts
17,000
receivable
Increase in accounts
10,000
payable
Decrease in income taxes
(4,500)
payable
—————
108,500
————
Net Cash Provided by
$1,98,500
Operating Activities
—————————————————————————————————

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 Prepared By: Md. Toufiq Hasan (24th Batch, AIS, RU)

E23-8 (Schedule of Net Cash Flow from Operating Activities-Indirect

Method) Ballard Co. reported $145,000 of net income for 2014. The accountant,
in preparing the statement of cash flows, noted the following items occurring
during 2014 that might affect cash flows from operating activities.

1. Ballard purchased 100 shares of treasury stock at a cost of $20 per share. These
shares were then resold at $25 per share.
2. Ballard sold 100 shares of IBM common at $200 per share. The acquisition
cost of these shares was $145 per share. This investment was shown on
Ballard's December 31, 2013, balance sheet as an available--for-sale security.
3. Ballard revised its estimate for bad debts. Before 2014, Ballard's bad debt
expense was 1% of its net sales. In 2014, this percentage was increased to 2%.
Net sales for 2014 were $500,000, and net accounts receivable decreased by
$12,000 during 2014.
4. Ballard issued 500 shares of its $10 par common stock for a patent. The market
price of the shares on the date of the transaction was $23 per share.
5. Depreciation expense is $39,000.
6. Ballard Co. holds 40% of the Nirvana Company's common stock as a long-
term investment. Nirvana Company reported $27,000 of net income for 2014.
7. Nirvana Company paid a total of $2,000 of cash dividends to all investees in
2014.
8. Ballard declared a 10% stock dividend. One thousand shares of $10 par
common stock were distributed. The market price at the date of issuance was
$20 per share.

Instructions
Prepare a schedule that shows the net cash flow from operating activities using the
indirect method. Assume no items other than those listed above affected the
computation of 2014 net cash flow from operating activities.

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 Prepared By: Md. Toufiq Hasan (24th Batch, AIS, RU)

Solution:
BALLARD COMPANY
Statement of Cash Flows (Partial )
FOR THE YEAR ENDED DECEMBER 31, 2014
—————————————————————————————————
Particulars
$ $
———————————
————— —————
——————
Cash flows from operating
activities
Net Income 145,000
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation Expense (5) 39,000
Gain on sale of
Investment (2) (5,500)
[(200-145) 100]
Decrease in accounts
12,000
receivable
Income from equity
method investment (10,800)
(27,000 40%)
Dividends from equity
800
method investment
—————
(2,000 40%)
35,500
————
Net Cash Provided by
$1,80,500
Operating Activities
—————————————————————————————————

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 Prepared By: Md. Toufiq Hasan (24th Batch, AIS, RU)

E23-11 (SCF-Indirect Method) Condensed financial data of Pat Metheny

Company for 2014 and 2013 are presented below.
—————————————————————————————————
PAT METHENY COMPANY
COMPARATIVE BALANCE SHEET
AS OF DECEMBER 31, 2014 AND 2013
—————————————————————————————————
2014 2013
Cash $1,800 $1,150
Receivables 1,750 1,300
Inventory 1,600 1,900
Plant assets 1,900 1,700
Accumulated depreciation (1,200) (1,170)
Long-term investments (held-to-maturity) 1,300 1,420
———— ————
$7,150 $6,300

Accounts payable $1,200 $900

Accrued liabilities 200 250
Bonds payable 1,400 1,550
Capital stock 1,900 1,700
Retained earnings 2,450 1,900
———— ————
$7,150 $6,300

—————————————————————————————————
PAT METHENY COMPANY
INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2014
—————————————————————————————————
Sales revenue $6,900
Cost of goods sold 4,700
————
Gross margin 2,200
Selling and administrative expenses 930
————
Income from operations 1,270
Other revenues and gains
Gain on sale of investments 80
————
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 Prepared By: Md. Toufiq Hasan (24th Batch, AIS, RU)

Income before tax 1,350

Income tax expense 540
————
Net income 810
Cash dividends 260
————
Income retained in business $550

Additional information:
During the year, $70 of common stock was issued in exchange for plant assets. No
plant assets were sold in 2014.

Instructions
Prepare a statement of cash flows using the indirect method.

8
 Prepared By: Md. Toufiq Hasan (24th Batch, AIS, RU)

E23-14 (SCF - Indirect Method) Brecker Inc., a greeting card company, had the
following statements prepared as of December 31, 2014.
—————————————————————————————————
BRECKER INC.
COMPARATIVE BALANCE SHEET
AS OF DECEMBER 31, 2014 AND 2013
—————————————————————————————————
12/31/14 12/31/13
————— —————
Cash $6,000 $7,000
Accounts receivable 62,000 51,000
Short-term investments (available-for-sale) 35,000 18,000
Inventory 40,000 60,000
Prepaid rent 5,000 4,000
Equipment 154,000 130,000
Accumulated depreciation - equipment (35,000) (25,000)
Copyrights 46,000 50,000
————— —————
Total assets $313,000 $295,000

Accounts payable $46,000 $40,000

Income taxes payable 4,000 6,000
Salaries and wages payable 8,000 4,000
Short-term loans payable 8,000 10,000
Long-term loans payable 60,000 69,000
Common stock, $10 par 100,000 100,000
Contributed capital, common stock 30,000 30,000
Retained earnings 57,000 36,000
————— —————
Total liabilities and stockholders' equity $313,000 $295,000

—————————————————————————————————
BRECKER INC.
INCOME STATEMENT
FOR THE YEAR ENDING DECEMBER 31, 2014
—————————————————————————————————
Sales revenue $338,150
Cost of goods sold 175,000
—————
Gross profit 163,150
9
 Prepared By: Md. Toufiq Hasan (24th Batch, AIS, RU)

Operating expenses 120,000

—————
Operating income 43,150
Interest expense $11,400
Gain on sale of equipment 2,000
————— 9,400

Income before tax 33,750

Income tax expense 6,750
—————
Net income $27,000

Additional information:
1. Dividends in the amount of $6,000 were declared and paid during 2014.
2. Depreciation expense and amortization expense are included in operating
expenses.
3. No unrealized gains or losses have occurred on the investments during the year.
4. Equipment that had a cost of $20,000 and was 70% depreciated was sold during
2014.

Instructions
Prepare a statement of cash flows using the indirect method.

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 Prepared By: Md. Toufiq Hasan (24th Batch, AIS, RU)

E23-15 (SCF-Indirect Method) Presented below are data taken from the records
of Alee Company.
Dec 31, 2014 Dec 31, 2013
Cash $15,000 $8,000
Current assets other than cash 85,000 60,000
Long-term investments 10,000 53,000
Plant assets 335,000 215,000
————— —————
$445,000 $336,000

Accumulated depreciation $20,000 $40,000

Current liabilities 40,000 22,000
Bonds payable 75,000 -0-
Capital stock 254,000 254,000
Retained earnings 56,000 20,000
————— —————
$445,000 $336,000

Additional information:
1. Held-to-maturity securities carried at a cost of $43,000 on December 31,
2013, were sold in 2014 for $34,000. The loss (not extraordinary) was
incorrectly charged directly to Retained Earnings.
2. Plant assets that cost $50,000 and were 80% depreciated were sold during
2014 for $8,000. The loss (not extraordinary) was incorrectly charged
directly to Retained Earnings.
3. Net income as reported on the income statement for the year was $57,000.
4. Dividends paid amounted to $10,000.
5. Depreciation charged for the year was $20,000.

Instructions
Prepare a statement of cash flows for the year 2014 using the indirect method.

11
 Prepared By: Md. Toufiq Hasan (24th Batch, AIS, RU)

E23-16 (Cash Provided by Operating, Investing, and Financing Activities) The

balance sheet data of Brown Company at the end of 2014 and 2013 follow.
2014 2013
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.

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 Prepared By: Md. Toufiq Hasan (24th Batch, AIS, RU)

E23-17 (SCF-Indirect Method and Balance Sheet) Jobim Inc. had the following
condensed balance sheet at the end of operations for 2013.
—————————————————————————————————
JOBIM INC.
BALANCE SHEET
DECEMBER 31, 2013
—————————————————————————————————
Cash $8,500 Current liabilities $15,000
Current assets other than cash 29,000 Long-term notes payable 25,500
Investments 20,000 Bonds payable 25,000
Plant assets (net) 67,500 Capital stock 75,000
Land 40,000 Retained earnings 24,500
———— ————
$165,000 $165,000

During 2014, the following occurred.

1. A tract of land was purchased for $9,000.
2. Bonds payable in the amount of $15,000 were redeemed at par.
3. An additional $10,000 in capital stock was issued at par.
4. Dividends totaling $9,375 were paid to stockholders.
5. Net income was $35,250 after allowing depreciation of $13,500.
6. Land was purchased through the issuance of $22,500 in bonds.
7. Jobim Inc. sold part of its investment portfolio for $12,875. This transaction
resulted in a gain of $2,000 for the company. The company classifies the
investments as available-for-sale.
8. Both current assets (other than cash) and current liabilities remained at the
same amount.

Instructions
(a) Prepare a statement of cash flows for 2014 using the indirect method.
(b) Prepare the condensed balance sheet for Jobim Inc. as it would appear at
December 31, 2014.

13
 Prepared By: Md. Toufiq Hasan (24th Batch, AIS, RU)

E23-18 (Partial SCF-Indirect Method) The accounts below appear in the ledger
of Anita Baker Company.

Retained Earnings Dr. Cr. Bal.

———————— ——— ——— ————
Jan. 1, 2014 Credit Balance $42,000
Aug. 15 Dividends (cash) $15,000 27,000
Dec. 31 Net Income for 2014 $40,000 67,000

Equipment Dr. Cr. Bal.

————— ——— ——— ————
Jan. 1, 2014 Debit Balance $140,000
Aug. 3 Purchase of Equipment $62,000 202,000
Sept. 10 Cost of Equipment Constructed 48,000 250,000
Nov. 15 Equipment Sold $56,000 194,000

Accumulated Depreciation-Equipment Dr. Cr. Bal.

———————————————— ——— ——— ————
Jan. 1, 2014 Credit Balance $84,000
Apr. 8 Extraordinary Repairs $21,000 63,000
Nov. 15 Accum. Depreciation on Equipment Sold 25,200 37,800
Dec. 31 Depreciation for 2014 $16,800 54,600

Instructions
From the postings in the accounts above, indicate how the information is reported
on a statement of cash flows by preparing a partial statement of cash flows using
the indirect method. The loss on sale of equipment (November 15) was $5,800.

14
 Prepared By: Md. Toufiq Hasan (24th Batch, AIS, RU)

P23-1 (SCF-Indirect Method) The following are Sullivan Corp.’s comparative

balance sheet accounts at December 31, 2014 and 2013, with a column showing
the increase (decrease) from 2013 to 2014.
—————————————————————————————————
COMPARATIVE BALANCE SHEETS
—————————————————————————————————
Increase
2014 2013 (Decrease)
———— ———— —————
Cash $815,000 $700,000 $115,000
Accounts receivable 11,28,000 11,68,000 (40,000)
Inventory 18,50,000 17,15,000 135,000
Property, plant, and equipment 33,07,000 29,67,000 340,000
Accumulated depreciation (11,65,000) (10,40,000) (125,000)
Investment in Myers Co. 310,000 275,000 35,000
Loan receivable 250,000 - 250,000
Total assets $64,95,000 $57,85,000 $710,000

Accounts payable $10,15,000 $955,000 $60,000

Income taxes payable 30,000 50,000 (20,000)
Dividends payable 80,000 100,000 (20,000)
Lease liability 400,000 - 400,000
Common stock, $1 par 500,000 500,000 -
Paid-in capital in excess of par-
15,00,000 15,00,000 -
common stock
Retained earnings 29,70,000 26,80,000 290,000
Total liabilities and stockholders'
$64,95,000 $57,85,000 $710,000
equity

Additional information:
1. On December 31, 2013, 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 $11,00,000. Myers
reported income of $140,000 for the year ended December 31, 2014. No
dividend was paid on Myers's common stock during the year.
2. During 2014, 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, 2014.

3. On January 2, 2014, Sullivan sold equipment costing $60,000, with a

15
 Prepared By: Md. Toufiq Hasan (24th Batch, AIS, RU)

carrying amount of $38,000, for $40,000 cash.

4. On December 31, 2014, 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, 2015.
5. Net income for 2014 was $370,000.
6. Sullivan declared and paid the following cash dividends for 2014 and 2013.
2014 2013
———— ————
Declared December 15, 2014 February 28, 2015
Paid December 15, 2013 February 28, 2014
Amount $80,000 $100,000

Instructions
Prepare a statement of cash flows for Sullivan Corp. for the year ended December
31, 2014, using the indirect method.

16
 Prepared By: Md. Toufiq Hasan (24th Batch, AIS, RU)

P23-2 (SCF-Indirect Method) The comparative balance sheets for Hinckley

Corporation show the following information.
December 31
2014 2013
———— ————
Cash $33,500 $13,000
Accounts receivable 12,250 10,000
Inventory 12,000 9,000
Investments -0- 3,000
Buildings -0- 29,750
Equipment 45,000 20,000
Patents 5,000 6,250
$107,750 $91,000
Allowance for doubtful
$3,000 $4,500
accounts
Accumulated depreciation
2,000 4,500
- equipment
Accumulated depreciation
-0- 6,000
- building
Accounts payable 5,000 3,000
Dividends payable -0- 5,000
Notes payable, short-term
3,000 4,000
(nontrade)
Long-term notes payable 31,000 25,000
Common stock 43,000 33,000
Retained earnings 20,750 6,000
$107,750 $91,000
Additional data related to 2014 are as follows.
1. Equipment that had cost $11,000 and was 40% depreciated at time of
disposal was sold for $2,500.
2. $10,000 of the long-term note payable was paid by issuing common stock.
3. Cash dividends paid were $5,000.
4. On January 1, 2014, the building was completely destroyed by a flood.
Insurance proceeds on the building were $30,000 (net of $2,000 taxes).
5. Investments (available-for-sale) were sold at $1,700 above their cost. The
company has made similar sales and investments in the past.
6. Cash was paid for the acquisition of equipment.
7. A long-term note for $16,000 was issued for the acquisition of equipment.
8. Interest of $2,000 and income taxes of $6,500 were paid in cash.

17
 Prepared By: Md. Toufiq Hasan (24th Batch, AIS, RU)

Instructions
Prepare a statement of cash flows using the indirect method. Flood damage is
unusual and infrequent in that part of the country.

18
 Prepared By: Md. Toufiq Hasan (24th Batch, AIS, RU)

P23-5 (SCF-Indirect Method) You have completed the field work in connection
with your audit of Alexander Corporation for the year ended December 31, 2014.
The balance sheet accounts at the beginning and end of the year are shown below.

Increase
2014 2013 (Decrease)
———— ———— —————
Cash $277,900 $298,000 ($20,100)
Accounts receivable 469,424 353,000 116,424
Inventory 741,700 610,000 131,700
Prepaid expenses 12,000 8,000 4,000
Investment in subsidiary 110,500 -0- 110,500
Cash surrender value of life insurance 2,304 1,800 504
Machinery 207,000 190,000 17,000
Buildings 535,200 407,900 127,300
Land 52,500 52,500 -0-
Patents 69,000 64,000 5,000
Copyrights 40,000 50,000 (10,000)
Bond discount and issue costs 4,502 -0- 4,502
$25,22,030 $20,35,200 $486,830

Income taxes payable $90,250 $79,600 $10,650

Accounts payable 299,280 280,000 19,280
Dividends payable 70,000 -0- 70,000
Bonds payable - 8% 125,000 -0- 125,000
Bonds payable - 12% -0- 100,000 (100,000)
Allowance for doubtful accounts 35,300 40,000 (4,700)
Accumulated depreciation - buildings 424,000 400,000 24,000
Accumulated depreciation -
173,000 130,000 43,000
machinery
Premium on bonds payable -0- 2,400 (2,400)
Common stock - no par 11,76,200 14,53,200 (277,000)
Paid-in capital in excess of par -
109,000 -0- 109,000
common stock
Retained earnings - unappropriated 20,000 (450,000) 470,000
$25,22,030 $20,35,200 $486,830

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 Prepared By: Md. Toufiq Hasan (24th Batch, AIS, RU)

—————————————————————————————————
STATEMENT OF RETAINED EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 2014
—————————————————————————————————
January 1, 2014 Balance (deficit) $(450,000)
Net income for first quarter of
March 31, 2014 25,000
2014
April 1, 2014 Transfer from paid-in capital 425,000
————
Balance -0-
Net income for last three
December 31, 2014 90,000
quarters of 2014
Dividend declared - payable
(70,000)
January 21, 2015
————
Balance $20,000
—————————————————————————————————

Your working papers from the audit contain the following information:
1. On April 1, 2014, the existing deficit was written off against paid-in capital
created by reducing the stated value of the no-par stock.
2. On November 1, 2014, 29,600 shares of no-par stock were sold for
$257,000. The board of directors voted to regard $5 per share as stated
capital.
3. A patent was purchased for $15,000.
4. During the year, machinery that had a cost basis of $16,400 and on which
there was accumulated depreciation of $5,200 was sold for $9,000. No other
plant assets were sold during the year.
5. The 12%, 20-year bonds were dated and issued on January 2, 2002. Interest
was payable on June 30 and December 31. They were sold originally at 106.
These bonds were redeemed at 100.9 plus accrued interest on March 31,
2014.
6. The 8%, 40-year bonds were dated January 1, 2014, and were sold on March
31 at 97 plus accrued interest. Interest is payable semiannually on June 30
and December 31. Expense of issuance was $839.
7. Alexander Corporation acquired 70% control in Crimson Company on
January 2, 2014, for $100,000. The income statement of Crimson Company

20
 Prepared By: Md. Toufiq Hasan (24th Batch, AIS, RU)

for 2014 shows a net income of $15,000.

8. Extraordinary repairs to buildings of $7,200 were charged to Accumulated
Depreciation - Buildings.
9. Interest paid in 2014 was $10,500 and income taxes paid were $34,000.

Instructions
From the information given, prepare a statement of cash flows using the indirect
method. A worksheet is not necessary, but the principal computations should be
supported by schedules or general ledger accounts. The company uses straight-line
amortization for bond interest.

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 Prepared By: Md. Toufiq Hasan (24th Batch, AIS, RU)

P23-6 (SCF-Indirect Method, and Net Cash Flow from Operating Activities,
Direct Method)
Comparative balance sheet accounts of Marcus Inc. are presented below.
—————————————————————————————————
MARCUS INC.
COMPARATIVE BALANCE SHEET ACCOUNTS
AS OF DECEMBER 31, 2014 AND 2013
—————————————————————————————————
December 31
Debit Accounts 2014 2013
———— ————
Cash $42,000 $33,750
Accounts receivable 70,500 60,000
Inventory 30,000 24,000
Investments (available-
22,250 38,500
for-sale)
Machinery 30,000 18,750
Buildings 67,500 56,250
Land 7,500 7,500
$269,750 $238,750
Credit Accounts
Allowance for doubtful
$2,250 $1,500
accounts
Accumulated depreciation
5,625 2,250
- Machinery
Accumulated depreciation
13,500 9,000
- Building
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.
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 Prepared By: Md. Toufiq Hasan (24th Batch, AIS, RU)

4. Investments that cost $25,000 were sold during the year for $28,750.
5. Machinery that cost $3,750, on which $750 of depreciation had
accumulated, was sold for $2,200.

Marcus's 2014 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
————
39,550
Income from operations
Other: Gain on sale of investments $3,750
Loss on sale of machinery (800)
———— 2,950
————
Net income $42,500

Instructions
(a) Compute net cash flow from operating activities using the direct method.
(b) Prepare a statement of cash flows using the indirect method.

23
 Prepared By: Md. Toufiq Hasan (24th Batch, AIS, RU)

P23-7 (SCF-Direct and Indirect Methods from Comparative Financial

Statements) 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, 2014, are as follows. The
company is preparing its statement of cash flows.
—————————————————————————————————
CHAPMAN COMPANY
COMPARATIVE BALANCE SHEET
AS OF MAY 31
—————————————————————————————————
2014 2013
———— ————
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
150,000 125,000
depreciation - plant assets
———— ————
Net plant assets 450,000 377,000
Total assets $782,250 $712,000

Current liabilities
Accounts payable $123,000 $115,000
Salaries and wages
47,250 72,000
payable
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
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 Prepared By: Md. Toufiq Hasan (24th Batch, AIS, RU)

Common stock, $10 par 370,000 280,000

Retained earnings 145,000 120,000
———— ————
Total stockholders' equity 515,000 400,000
———— ————
Total liabilities and
$782,250 $712,000
stockholders' equity

—————————————————————————————————
CHAPMAN COMPANY
INCOME STATEMENT
FOR THE YEAR ENDED MAY 31, 2014
—————————————————————————————————
Sales revenue $12,55,250
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, 2014.

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.

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 Prepared By: Md. Toufiq Hasan (24th Batch, AIS, RU)

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, 2014, 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, 2014.

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 Prepared By: Md. Toufiq Hasan (24th Batch, AIS, RU)

P23-8 (SCF-Direct and Indirect Methods) Comparative balance sheet accounts

of Sharpe Company are presented below.
—————————————————————————————————
SHARPE COMPANY
COMPARATIVE BALANCE SHEET ACCOUNTS
AS OF DECEMBER 31
—————————————————————————————————
2014 2013
Debit Balances
———— ————
Cash $70,000 $51,000
Accounts receivable 155,000 130,000
Inventory 75,000 61,000
Investments (available-
55,000 85,000
for-sale)
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
$10,000 $8,000
Accounts
Accumulated
21,000 14,000
Depreciation-Equipment
Accumulated
37,000 28,000
Depreciation-Buildings
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 2014.
2. Cash dividends were declared and paid during the year.
3. Common stock was issued in exchange for land.

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 Prepared By: Md. Toufiq Hasan (24th Batch, AIS, RU)

4. Investments that cost $35,000 were sold during the year.

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

Sharpe's 2014 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.

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 Prepared By: Md. Toufiq Hasan (24th Batch, AIS, RU)

P23-9 (Indirect SCF) Dingel Corporation has contracted with you to prepare a
statement of cash flows. The controller has provided the following information.
December 31
————————
2014 2013
———— ————
Cash $38,500 $13,000
Accounts receivable 12,250 10,000
Inventory 12,000 10,000
Investments -0- 3,000
Buildings -0- 29,750
Equipment 40,000 20,000
Copyrights 5,000 5,250
———— ————
Totals 107,750 91,000

Allowance for doubtful

$3,000 $4,500
accounts
Accumulated depreciation
2,000 3,000
- equipment
Accumulated
-0- 6,000
depreciation-buildings
Accounts payable 5,000 4,000
Dividends payable -0- 5,000
Notes payable, short-term
3,000 4,000
(non-trade)
Long-term notes payable 36,000 25,000
Common stock 38,000 33,000
Retained earnings 20,750 5,000
Totals 107,750 91,000

Additional data related to 2014 are as follows.

1. Equipment that had cost $11,000 and was 30% depreciated at time of disposal
was sold for $2,500.
2. $5,000 of the long-term note payable was paid by issuing common stock.
3. Cash dividends paid were $5,000.
4. On January 1, 2014, the building was completely destroyed by a flood.

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 Prepared By: Md. Toufiq Hasan (24th Batch, AIS, RU)

Insurance proceeds on the building were $33,000 (net of $4,000 taxes).

5. Investments (available for sale) were sold at $1,500 above their cost. The
company has made similar sales and investments in the past.
6. Cash and a long-term note for $16,000 were given for the acquisition of
equipment.
7. Interest of $2,000 and income taxes of $5,000 were paid in cash.
Instructions
(a) Use the indirect method to analyze the above information and prepare a
statement of cash flows for Dingel. Flood damage is unusual and infrequent in that
part of the country.
(b) What would you expect to observe in the operating, investing, and financing
sections of a statement of cash flows of:
(1) A severely financially troubled firm?
(2) A recently formed firm that is experiencing rapid growth?

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