FRA Extra questions

Question on Statement of Cash Flows

Balance Sheet for UMA company

At December 31 Current yr Prior Yr

Assets
Cash 43050 23925
Accounts Receivables 34125 39825
Inventory 156000 146475
Prepaid expenses 3600 1650
Total Current Assets 236775 211875
Equipment 135825 146700
Accum. Depreciation (61950) (47550)
Total Assets 310650 311025

Liabilities
Accounts Payable 28800 33750
Income Taxes payable 5100 4425
Dividends payable 0 4500
Total current liabilities 33900 42675

Equity
Common Stock, $10 par 168750 168750
Retained Earnings 108000 62100
Total liabilities and equity 310650 311025

Income Statement for UMA company for current year ended 31 December
Sales 446100
Cost of Goods Sold 222300
Operating expenses
(excluding depreciation) 120300
Depreciation expense 25500 (368100)
Other gains (losses)
Loss on Sale of equipment 3300
Loss on retirement of bonds 825 (4125)
Income before taxes 73875
Income tax expense (13725)
Net Income 60150

Additional information for the current year

1. Equipment costing $21375 with accumulated depreciation of $11100 is sold for cash.
2. Equipment purchases are for cash.
3. Accumulated depreciation is affected by depreciation expense and the sale of equipment.
4. The balance of retained earnings is affected by dividend declarations and net income.
5. All sales are made on credit
6. All inventory purchases are on credit.
7. Accounts payables balances result from inventory purchases.
8. Prepaid expenses relate to operating expenses.
Questions:
1. Prepare a statement of cash flows using the indirect method for the current year.
2. Prepare a statement of cash flows using the direct method for the current year.

Q2. Bryant Co. reports net income of $20000. For the year, depreciation expense is $7,000 and the
company reports a gain of $3,000 from sale of machinery. It also had a $2,000 loss from retirement of
notes. Compute cash flows from operations using the indirect method.

Solution.

Cash Flows from Operating Activities (Indirect)

Net Income...................................................................................................... $20,000

Adjustments to reconcile net income to net cash provided by operating
activities

Income statement items not affecting cash

Depreciation expense .............................................................................. 7,000
Gain on sale of machinery...................................................................... (3,000)
Loss on retirement of notes .................................................................... 2,000
Cash provided by (used for) operating activities ............................................ $26,000

Q3. Use the following information to determine cash flows from operating activities using the indirect
method.

MOSS COMPANY Income Statement

For Year ended December 31, 2020 MOSS COMPANY
2020 2021
Sales 515000 Balance Sheet
Cost of Goods Sold 331600 Current Assets
Gross Profit 183400 Cash 84650 26800
Operating expenses (excluding Accounts Receivable 25000 32000
121500 Inventory 60000 54100
depreciation)
Depreciation 36000 Current Liabilities
Income before taxes 25900 Accounts Payable 30400 25700
Income taxes expense 7700 Income taxes payables 2050 2200
Net Income 18200
Solution 3:

Cash flows from operating activities

Net income .......................................................................................................... $18,200
Adjustments to reconcile net income to net cash provided by operating
activities
Income statement items not affecting cash
Depreciation expense .................................................................................... $36,000
Changes in current operating assets and liabilities
Accounts receivable decrease ....................................................................... 7,000
Inventory increase ........................................................................................ (5,900)
Accounts payable increase ........................................................................... 4,700
Income taxes payable decrease .................................................................... (150) 41,650
Net cash provided from operating activities .................................................... $59,850

Q4. Using the following information for VIP Co. to prepare a statement of cash flows for the year
ended December 31 using the indirect method.

Cash balance at prior year end 40000

Increase in inventory 5000
Depreciation expense 4000
Cash received from issuing stock 8000
Cash paid for dividends 1000
Gain on sale of machinery 2000
Cash received from sale of machinery 9500
Increase in accounts payable 1500
Net Income 23000
Decrease in accounts receivables 3000

Solution:
VPI CO.
Statement of Cash Flows (Indirect Method)
For Current Year Ended December 31
Cash flows from operating activities
Net income .................................................................................................... $23,000
Adjustments to reconcile net income to net cash provided by operating
activities

Income statement items not affecting cash

Depreciation expense ................................................................................. $ 4,000
Gain on sale of machinery ......................................................................... (2,000)

Changes in current operating assets and liabilities

 Decrease in accounts receivable ................................................................ 3,000
Increase in inventory ................................................................................. (5,000)
Increase in accounts payable ..................................................................... 1,500
Net cash provided by operating activities .................................................. $24,500
Cash flows from investing activities
Cash received from sale of machinery ....................................................... 9,500
Net cash provided by investing activities ................................................... 9,500
Cash flows from financing activities
Cash received from issuing stock ................................................................ 8,000
Cash paid for dividends ............................................................................... (1,000)
Net cash provided by financing activities................................................... 7,000
Net increase in cash ......................................................................................... $41,000
Cash balance at prior year-end...................................................................... 40,000
Cash balance at current year-end.................................................................. $81,000

Q5. The following financial statements and additional information are reported. Prepare a statement of
cash flows using the direct method for the year ended June 30, 2021.

IKIBAN INC.
Income statement
For year ended Jun 30, 2020
Sales 678000
Cost of Goods sold 411000
Gross Profut 267000
Operating expenses (excluding
67000
depreciation)
Depreciation expense 58600
Other gains (losses)
Gain on sale of equipment 2000
Income before taxes 1434000
Income tax expense 43890
Net Income 99510
 IKIBAN INC. Additional information
Income statement
For year ended Jun 30, 2020 a. A 30,000$ note payable is
At June 30 2020 2019 retired at its $30,000 carrying
Assets value in exchange for cash.
Cash 87500 44000 b. The only changes affecting
retained earnings are net
Accounts Receivables, net 65000 51000
income and cash dividends
Inventory 63800 86500 paid.
Prepaid expenses 4400 5400 c. New equipment is acquired for
Total current assets 220700 186900 $57,600 cash.
Equipment 124000 115000 d. Received cash for the sale of
Accu. Depreciation on equipment (27000) (9000) equipment that has cost $48600,
317700 292900 yielding a $2000 gain.
Total Assets
e. Prepaid expenses and wages
Liabilities and Equity payables relate to operating
Accounts Payable 25000 30000 expenses on the income
Wages Payable 6000 15000 statement.
Income taxes payable 3400 3800 f. All purchase and sale of
Total current liabilities 34400 48800 inventory are on credit.
Notes payable (long term) 30000 60000
Total liabilities 64400 108800
Equity CHECK
Common stock, $5 par value 220000 160000 I) Cash paid for dividends is $90,310
Retained earnings 33300 24100 II) Cash received from equipment
Total Liabilities and equity 317700 292900 sale amounts to $10,000.

Solution:

IKIBAN, INC.
Statement of Cash Flows (Direct Method)
For Year Ended June 30, 2020

Cash flows from operating activities

Cash received from customers (Note 1) ........................................ $664,000

Cash paid for inventory (Note 2) ................................................... (393,300)

Cash paid for operating expenses (Note 3) ................................... (75,000)

Cash paid for income taxes (Note 4) .............................................. (44,290)

Net cash provided by operating activities ..................................... $151,410

Cash flows from investing activities

Cash received from sale of equip. (Note 5) ................................... 10,000

 Cash paid for equipment (Note 5—given) .................................... (57,600)

Net cash used in investing activities ............................................... (47,600)

Cash flows from financing activities

Cash received from stock issuance ................................................ 60,000

Cash paid to retire notes (Note 6) .................................................. (30,000)

Cash paid for dividends (Note 7) ................................................... (90,310)

Net cash used in financing activities .............................................. (60,310)

Net increase in cash ............................................................................ $ 43,500

Cash balance at prior year-end......................................................... 44,000

Cash balance at current year-end..................................................... $ 87,500

Notes
(1) Sales .......................................................................................................................... $678,000
Less increase in accounts receivable...................................................................... (14,000)
Cash received from customers ............................................................................... $664,000

(2) Cost of goods sold .................................................................................................... $411,000

Less decrease in inventory...................................................................................... (22,700)
Purchases ................................................................................................................. 388,300
Plus decrease in accounts payable ......................................................................... 5,000
Cash paid for inventory .......................................................................................... $393,300

(3) Other operating expenses ....................................................................................... $ 67,000

Plus decrease in wages payable .............................................................................. 9,000
Less decrease in prepaid expenses ......................................................................... (1,000)
Cash paid for other operating expenses ................................................................ $ 75,000

(4) Income taxes expense .............................................................................................. $ 43,890

 Plus decrease in income taxes payable .................................................................. 400
Cash paid for income taxes .................................................................................... $ 44,290

(5) Cost of equipment sold (Given) ............................................................................. $ 48,600

Accumulated depreciation of equipment sold* .................................................... (40,600)
Book value of equipment sold ................................................................................ 8,000
Gain on sale of equipment ...................................................................................... 2,000
Cash receipt from sale of equipment ..................................................................... $ 10,000

Cost of equipment sold ........................................................................................... $ 48,600

Plus net increase in the equipment account balance ............................................ 9,000
Cash paid for new equipment (given) ................................................................... $ 57,600

Equipment Accumulated Depreciation, Equipment

Bal., 6/30/2019 115,000 Bal., 6/30/2019 9,000

Purchase 57,600 Sale 48,600 Sale *40,600 Depr. Expense 58,600

Bal., 6/30/2020 124,000 Bal., 6/30/2020 27,000

(6) Carrying value of notes retired .............................................................................. $ 30,000

Cash payment to retire notes ................................................................................. $ 30,000

(7)
Retained Earnings

Bal., 6/30/2019 24,100

Dividends (plug) 90,310 Net income 99,510

Bal., 6/30/2020 33,300