23

The Statement of Cash Flows

Direct Method

DEMONSTRATION PROBLEM
The financial statements of Bolero Corporation follow.

Copyright Houghton Mifflin Company. All rights reserved.

Bolero Corporation
Income Statement
For Year Ended June 30, 2005
Revenue from Sales:
Sales
Less Sales Returns and
Allowances
Net Sales
Cost of Good Sold:
Merchandise Inventory,
July 1, 2004
Purchases
Less: Purchases Returns and
Allowances
Purchases Discounts

$570,960.00
12,960.00
$558,000.00

$163,200.00
$372,720.00
$6,360.00
5,520.00

Net Purchases
Add Freight In
Delivered Cost of Purchases
Cost of Goods Available for Sale
Less Merchandise Inventory,
June 30, 2005
Cost of Good Sold
Gross Profit
Operating Expenses:
Salary Expense
Payroll Tax Expense
Advertising Expense
Depreciation Expense, Building
Depreciation Expense, Equipment
Supplies Expense
Insurance Expense
Miscellaneous Expense
Total Operating Expenses
Income from Operations
Other Income:
Interest Income
Other Expenses:
Interest Expense
Income Before Income Taxes
Income Tax Expense
Net Income

Copyright Houghton Mifflin Company. All rights reserved.

11,880.00
$360,840.00
18,360.00
379,200.00
$542,400.00
170,400.00
372,000.00
$186,000.00
$ 88,200.00
9,780.00
4,260.00
14,400.00
8,400.00
1,920.00
1,260.00
840.00
129,060.00
$ 56,940.00
$

840.00
12,000.00

11,160.00
$ 45,780.00
11,880.00
$ 33,900.00

Bolero Corporation
Statement of Retained Earnings
For Year Ended June 30, 2005
Unappropriated Retained Earnings
Unappropriated Retained Earnings,
July 1, 2004
Net Income for the Year
Less: Cash Dividends Declared
Transfer to Appropriations for Plant
Expansion (see below)
Unappropriated Retained Earnings,
June 30, 2005
Appropriated Retained Earnings:
Appropriated for Plant Expansion
July 1, 2004
Add Appropriation for the Year (see above)
Retained Earnings Appropriated,
June 30, 2005
Total Retained Earnings

Copyright Houghton Mifflin Company. All rights reserved.

$35,640.00
33,900.00
$15,600.00

$69,540.00

6,000.00

21,600.00
$47,940.00

$24,000.00
6,000.00
30,000.00
$77,940.00

Bolero Corporation
Comparative Balance Sheet
June 30, 2005 and June 30, 2004

2005

2004

Increase or
(Decrease)

$ 29,820.00
0.00
56,700.00
28,860.00
170,400.00
360.00
180.00
37,200.00
264,000.00
( 129,600.00)
44,400.00
( 25,200.00)
$477,120.00

$ 22,020.00
10,800.00
37,440.00
0.00
163,200.00
240.00
420.00
37,200.00
264,000.00
( 115,200.00)
44,400.00
( 16,800.00)
$447,720.00

$ 7,800.00
( 10,800.00)
19,260.00
28,860.00
7,200.00
120.00
(
240.00)
0.00
0.00
( 14,400.00)
0.00
( 8,400.00)
$29,400.00

$ 35,220.00
2,520.00
1,140.00
1,320.00
129,600.00
$169,800.00

$ 51,360.00
2,940.00
840.00
1,560.00
136,800.00
$193,500.00

($16,140.00)
(
420.00)
300.00
(
240.00)
( 7,200.00)
($23,700.00)

$172,200.00
25,860.00
31,320.00
47,940.00

$166,800.00
0.00
27,780.00
35,640.00

$ 5,400.00
25,860.00
3,540.00
12,300.00

30,000.00
$307,320.00
$477,120.00

24,000.00
$254,220.00
$447,720.00

6,000.00
$53,100.00
$29,400.00

Assets
Cash
Notes Receivable
Accounts Receivable (net)
Subscriptions Receivable, Common Stock
Merchandise Inventory
Supplies
Prepaid Insurance
Land
Building
Less Accumulated Depreciation
Equipment
Less Accumulated Depreciation
Total Assets
Liabilities
Accounts Payable
Salaries Payable
Income Tax Payable
Interest Payable
Mortgage Payable
Total Liabilities
Stockholder's Equity
Common Stock
Common Stock Subscribed
Paid-in Capital in Excess of Par Value
Unappropriated Retained Earnings
Retained Earnings Appropriated for
Plant Expansion
Total Stockholders' Equity
Total Liabilities and Stockholders' Equity

Transactions recorded:
a. Paid $7,200 on the principal plus $12,000 interest on the mortgage.
b. Collected note receivable, $10,800, plus $840 interest.
c. Received subscription for common stock, $34,800, having a par value of $31,260.
d. Received $5,940 from subscribers of common stock, having a par value of
$5,400, and issued the stock.

Instructions
Prepare a statement of cash flows.

Copyright Houghton Mifflin Company. All rights reserved.

SOLUTION
Cash Receipts from Customers:
Net Sales
+ Beginning Accounts Receivable
= Total

Ending Accounts Receivable

= Cash Receipts from Customers

Cash Payments for Merchandise Purchases:

Delivered Cost of Purchases
+ Beginning Accounts Payable
= Total
Ending Accounts Payable
= Cash Payments for Merchandise Purchases

Cash Payments to Employees:

Salary Expense
+ Beginning Salaries Payable
= Total
Ending Salaries Payable
= Cash Payments to Employees

Cash Payments for Supplies:

Supplies Expense
+ Ending Supplies
= Total
Beginning Supplies
= Cash Payments for Supplies

Cash Payments for Insurance:

Insurance Expense
+ Ending Prepaid Insurance
= Total
Beginning Prepaid Insurance
= Cash Payments for Insurance

Cash Payments for Interest:

Interest Expense
+ Beginning Interest Payable
= Total
Ending Interest Payable
= Cash Payments for Interest
Cash Payments for Income Taxes:
Income Tax Expense
+ Beginning Income Tax Payable
= Total
Ending Income Tax Payable
= Cash Payments for Income Taxes

Copyright Houghton Mifflin Company. All rights reserved.

$558,000
37,440
$595,440
56,700
$538,740
$379,200
51,360
$430,560
35,220
$395,340
$ 88,200
2,940
$ 91,140

2,520
$ 88,620
$
$

$
$
$

1,920
360
2,280
240
2,040
1,260
180
1,440
420
1,020

$ 12,000
+
1,560
$ 13,560

1,320
$ 12,240
$ 11,880
840
$ 12,720

1,140
$ 11,580

SOLUTION (continued)
GENERAL JOURNAL
DATE
1
2

2004
a.

3
4

DESCRIPTION

POST.
REF.

PAGE

DEBIT

CREDIT
1

Mortgage Payable
Interest Expense
Cash

7,200.00
12,000.00

Cash
Notes Receivable
Interest Income

11,640.00

Subscriptions Receivable, Common Stock

Common Stock Subscribed
Paid-in Capital in Excess of Par Value

34,800.00

2
3

19,200.00

5
6

b.

7
8

10,800.00
840.00

9
10

12

16

31,260.00
3,540.00

19

11
12
13

d.

Cash
Subscriptions Receivable, Common
Stock

5,940.00

14
15

5,940.00

17
18

10

13

15

c.

11

14

16
17

Common Stock Subscribed

Common Stock

20

Copyright Houghton Mifflin Company. All rights reserved.

5,400.00

18

5,400.00

19
20

SOLUTION (continued)
Bolero Corporation
Statement of Cash Flows
For Year Ended June 30, 2005
Cash Flows from (used by) Operating Activities:
Cash Receipts from:
Customers
Interest
Total Cash Receipts
Cash Payments for:
Merchandise Purchases
Operating Expenses:
Employees
Payroll Taxes
Advertising
Supplies
Insurance
Miscellaneous
Total
Interest
Income Taxes
Total Cash Payments
Net Cash Flows from Operating Activities
Cash Flows from (used by) Investing Activities:
Proceeds of Notes Receivable
Net Cash Flows from Investing Activities
Cash Flows from (used by) Financing Activities:
Repayment of Mortgage
Issuance of Common Stock
Payment of Dividends
Net Cash Flow used by Financing Activities
Net Increase (Decrease) in Cash

Copyright Houghton Mifflin Company. All rights reserved.

$538,740.00
840.00
$539,580.00
$395,340.00
$88,620.00
9,780.00
4,260.00
2,040.00
1,020.00
840.00
106,560.00
12,240.00
11,580.00
525,720.00
$ 13,860.00
$ 10,800.00
10,800.00
($
(

7,200.00)
5,940.00
15,600.00)
( 16,860.00)
$ 7,800.00