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Forty-Love Tennis
Cash Flow Assignment

MGMT 1B

Winter 2022

Prof. Elizabeth Woo

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Introduction: Forty-Love Tennis Company is a retail store corporation, which began operations in March,
Y0. Forty-Love has continued to grow and serve customers and has just completed its third year of
operations. The company’s only shareholder, Philip Yur-Karte, has hired you to prepare the Statement of
Cash Flows for the year ended December 31, 20Y2. Forty-Love’s current-year income statement,
comparative balance sheets, and additional information follow.

For the year:

1. All sales are credit sales;

2. All credits to Accounts Receivable represent cash received from customers;
3. All purchases of Merchandise Inventory are made on account (i.e., credit);
4. All debits to Accounts Payable reflect cash payments for Merchandise Inventory;
5. Other Expenses are paid in advance and initially debited to Prepaid Expenses;
6. Income tax expense and interest expense are paid in cash during the year (e.g., there is no
accrual of “income taxes payable” or “interest payable”).
Directions:

I. Prepare a complete Statement of Cash Flows using the indirect method for the year-ending
December 31, 20Y2.
II. Properly disclose or present any non-cash investing and financing activities.
III. Prepare the operating section of the Statement of Cash Flows using the direct method for
the year-ending December 31, 20Y2.

Forty-Love Tennis Company

Statement of Operations
For the Year Ended December 31, 20Y2

Sales $1,200,000
Cost of Goods Sold 695,000
Gross Profit 505,000

Operating Expenses
Depreciation expense $42,000
Other expenses 271,900 313,900
Operating Income 191,100

Other income (expense)

Gain on sale of equipment 4,000
Interest expense (5,000)

Income before taxes 190,100

Income tax expense 32,000
Net income $158,100

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Forty-Love Tennis Company

Balance Sheets
As of December 31, 20Y2 and 20Y1
20Y2 20Y1
Assets
Cash & Cash Equivalents $72,600 $55,550 $17,050
Accounts Receivable 77,100 80,750 ($3,650)
Merchandise Inventory 237,600 242,000 ($4,400)
Prepaid Expenses 15,100 17,400 ($2,300)
Total Current Assets 402,400 395,700 $6,700
Property Plant & Equipment 272,000 206,300 $65,700
Less: Accumulated Depreciation (114,150) (95,000) ($19,150)
Total Assets $560,250 $507,000 $53,250

Liabilities and Equity

Accounts Payable $17,750 $102,000 ($84,250)
Total Current Liabilities 17,750 102,000 ($84,250)
Long-term Notes Payable 67,500 77,500 ($10,000)
Total Liabilities 85,250 179,500 ($94,250)

Common Stock, $5 par value 215,000 200,000 $15,000

Paid-in capital, in excess of par 30,000 0 $30,000
Retained earnings 230,000 127,500 $102,500
Total Liabilities and Equity $560,250 $507,000 $53,250

Additional Information on 20Y2 Transactions:

a. Sold equipment costing $54,300 with accumulated depreciation of $22,850, for $35,450 cash.
b. Purchased equipment costing $120,000 by paying $70,000 cash and signing a long‐term note
payable for the remainder of the balance.
c. Paid $60,000 cash to reduce the long‐term note payable.
d. Issued 3,000 shares of common stock for $15 cash per share.
e. Declared and paid cash dividends of $55,600.
f. Purchased a 2‐month treasury bond on 12/1/20Y2 for $20,000 with the intention of holding it to
maturity.

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Forty-Love Tennis Company

Statement of Cash Flows (indirect method)
For The Period Ended 12/31/Y2
Cash from operating activities
Net income $158,100
Adjustments to reconcile net income to net cash from operating activities
Operating activities
Depreciation expense 42,000
Gain on sale of PP&E (4,000)
Changes in operating assets and liabilities
Decrease in A/R 3,650
Decrease in Merchandise inventory 4,400
Decrease in prepaid expense 2,300
Decrease in A/P (84,250)
Cash provided by [Link] 122,200
Cash from investing activities
Sale of PP&E 35,450
Purchase of PP&E (70,000)
Cash used [Link] (34,550)

Cash from financing activities

Issue Common Stock 45,000
Repayment of LT N/P (60,000)
Paid dividends (55,600)
Cash used in [Link] (70,600)

Change in cash 17,050

Beginning cash 55,550
Ending cash $72,600

Disclosure: Non-cash Investing and Financing Activities

(Investing) Purchase of PP&E with LT N/P (50,000)
(Financing) Assumption of LT N/P to finance PP&E 50,000

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Space to show your work:

A.

Cash $35,450

A/D - PP&E $22,850

Gain on sale $4,000

PP&E $54,300

(Sold equipment with A/D)

B.

PP&E $120,000

Cash $70,000

LT N/P $50,000

(Purchased equipment with cash and LT N/P)

C.

LT N/P $60,000

Cash $60,000

(Paid cash to reduce LT N/P)

D.

Cash $45,000

C/ST at par $15,000

PIC - XS of par $30,000

(Issued 3,000 shares of C/ST for $15 cash per share)

E.

R/E $55,600

Cash $55,600

(Paid cash dividends)

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Space to show your work:

Cash
Operating

Net income 158,100

Depression Exp 42,000 Gain on sale of PP&E 4,000
Decrease in A/R 3,650
Decrease in M. inventory 4,400
Decrease in prepaid
2,300 Decrease in A/P 84,250
expenses

122,200
Investing
Sale of PP&E 35,450 Purchase of PP&E 70,000

(34,550)
Financing

Issue common stock 45,000 Repayment of LT N/P 60,000

Paid dividend 55,600

(70,600)
$17,050

Change in A/R Change in Inventory Change in Prepaid Exp.

3,650 4,400 2,300

3,650 4,400 2,300

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Change in PP&E Change in A/D Change in A/P

54,300 22,850 84,250

120,000 42,000

65,700 19,150 84,250

Change in ST N/P Change in LT N/P Change in C/ST

50,000 15,000

60,000

10,000 15,000

Change in PIC – XS of par Change in R/E

30,000 158,100

55,600

30,000 102,500

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Forty-Love Tennis Company

Statement of Cash Flows (Direct Method, Operating section only)
For the Period Ended 12/31/Y2
“Cash from” Operating Activities
Cash collected from customers $1,203,650
Cash paid for merchandise inventory (774,850)
Cash paid for operation expenses (269,600)
Cash paid for taxes (32,000)
Cash paid for interest (5,000)

Net cash provided by operation $122,200

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Space to show your work:

Cash collected from customers

● Change in A/R: (3,650)

● Cash collected from customers: Sales - change in A/R = 1,200,000 + 3,650 = 1,203,650

Cash paid for Merchandise Inventory

● Cash paid for inventory = COGS + decrease in A/P + Increase in inventory balance= 695,000 +
84,250 - 4,400 = 774,850

Cash paid for Operating Expense:

● Operating expenses - decrease in prepaid expenses = 271,900 - 2,300 = 269,600

Cash paid for income tax expense:

● 32,000

Cash paid for interest expense:

● 5,000

A/R $1,200,000

Sales $1,200,000

(Sold goods on account)

Cash $1,203,650

A/R $1,203,650

(Collected cash from customers)

A/P $774,850

Cash $774,850

(Paid cash to reduce A/P)

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Prepaid exp $269,600

Cash $269,000

(Debited prepaid exp for operating expense)

Income tax exp $32,000

Cash $32,000

(Paid cash to reduce income tax expense)

Interest exp $5,000

Cash $5,000

(Paid cash to reduce interest expense)

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