Statement of Cash flows

Solved Problems for Guidance

Problem 1:
The income statement of Frank Company is shown below:
FRANK COMPANY
Income Statement
For the Year Ended December 31, 2012

Sales $8,400,000
Cost of goods sold 5,400,000
Gross profit 3,000,000
Operating expenses
Selling expenses $500,000
Administrative expense 700,000
Depreciation expense 90,000
Amortization expense 30,000 1,320,000
Net income $1,680,000

Additional information:
1. Accounts receivable increased $400,000 during the year.
2. Inventory increased $250,000 during the year.
3. Prepaid expenses increased $200,000 during the year.
4. Accounts payable to merchandise suppliers increased $100,000 during the year.
5. Accrued expenses payable increased $160,000 during the year.

Instructions
Prepare the operating activities section of the statement of cash flows for the year ended
December 31, 2012, for Frank Company, using the direct method.

Solution
FRANK COMPANY
Statement of Cash Flows
For the Year Ended December 31, 2012
Cash flows from operating activities
Cash receipts from customers $8,000,000 (1)
Cash payments:
To suppliers $5,550,000 (2)
For operating expenses 1,240,000 (3) 6,790,000
Net cash provided by operations $1,210,000

(1) Sales $8,400,000

Deduct: Increase in accounts receivable 400,000
 Cash receipts from customers $8,000,000

(2) Cost of goods sold $5,400,000

Add: Increase in inventory 250,000
Purchases 5,650,000
Deduct: Increase in accounts payable 100,000
Cash payments to suppliers $5,550,000

(3) Operating expenses exclusive of depreciation and amortization $1,200,000

Add: Increase in prepaid expenses 200,000
Deduct: Increase in accrued expenses payable (160,000)
Cash payments for operating expenses $1,240,000

Problem 2
The financial statements of Costco Company appear below:
COSTCO COMPANY
Comparative Balance Sheet December 31
2012 2011
Assets
Cash $ 38,000 $ 23,000
Accounts receivable 26,000 34,000
Merchandise inventory 30,000 15,000
Property, plant, and equipment 50,000 78,000
Accumulated depreciation (20,000) (24,000)
Total $124,000 $126,000

Liabilities and Stockholders' Equity

Accounts payable $ 17,000 $ 23,000
Income taxes payable 13,000 8,000
Bonds payable 7,000 33,000
Common stock 41,000 24,000
Retained earnings 46,000 38,000
Total $124,000 $126,000

COSTCO COMPANY
Income Statement
For the Year Ended December 31, 2012
Sales $400,000
Cost of goods sold 280,000
Gross profit 120,000
Operating expenses 46,000
Income from operations 74,000
Interest expense 4,000
Income before income taxes 70,000
Income tax expense 21,000
Net income $ 49,000
 The following additional data were provided:
1. Dividends declared and paid were $41,000.
2. During the year, equipment was sold for $15,000 cash. This equipment cost $28,000
originally and had a book value of $15,000 at the time of sale.
3. All depreciation expense is in the operating expenses.
4. All sales and purchases are on account.
5. Accounts payable pertain to merchandise suppliers.
6. All operating expenses except for depreciation were paid in cash.

Instructions
Prepare a statement of cash flows for Costco Company using the direct method.

Solution
COSTCO COMPANY
Statement of Cash Flows
For the Year Ended December 31, 2012

Cash flows from operating activities

Cash receipts from customers ($400,000 + $8,000) $408,000
Cash payments:
To suppliers $301,000 (1)
For operating expenses 37,000 (2)
For interest expense 4,000
For income taxes ($21,000 – $5,000) 16,000 358,000
Net cash provided by operating activities 50,000
Cash flows from investing activities
Sale of equipment 15,000
Net cash provided by investing activities 15,000
Cash flows from financing activities
Redemption of bonds payable (26,000)
Issuance of common stock 17,000
Payment of cash dividend (41,000)
Net cash used by financing activities (50,000)
Net increase in cash 15,000
Cash at beginning of period 23,000
Cash at end of period $ 38,000

(1) Cost of goods sold $280,000

Add: Increase in inventory 15,000
Purchases 295,000
Add: Decrease in accounts payable 6,000
Cash payments to suppliers $301,000

(2) Operating expenses $46,000

Less: Depreciation expense (9,000)*
Cash payments for operating expenses $37,000
 *$24,000 – $13,000 = $11,000 balance in accumulated depreciation after sale.
Ending balance, $20,000 – $11,000 = $9,000 depreciation expense.

Problem 3:
Condensed financial data of Drake Company appear below:
DRAKE COMPANY
Comparative Balance Sheet
December 31
2012 2011
Assets
Cash $ 41,000 $ 35,000
Accounts receivable 75,000 53,000
Inventories 120,000 132,000
Prepaid expenses 19,000 25,000
Investments 100,000 75,000
Plant assets 325,000 250,000
Accumulated depreciation (65,000) (60,000)
Total $615,000 $510,000

Liabilities and Stockholders' Equity

Accounts payable $ 93,000 $ 75,000
Accrued expenses payable 29,000 24,000
Bonds payable 120,000 160,000
Common stock 275,000 170,000
Retained earnings 98,000 81,000
Total $615,000 $510,000

DRAKE COMPANY
Income Statement
For the Year Ended December 31, 2012
Sales $450,000
Less:
Cost of goods sold $300,000
Operating expenses (excluding depreciation) 60,000
Depreciation expense 17,000
Income taxes 20,000
Interest expense 18,000
Loss on sale of plant assets 3,000 418,000
Net income $ 32,000

Additional information:
1. New plant assets costing $100,000 were purchased for cash in 2012.
2. Old plant assets costing $25,000 were sold for $10,000 cash when book value was
$13,000.
3. Bonds with a face value of $40,000 were converted into $40,000 of common stock.
4. A cash dividend of $15,000 was declared and paid during the year.
5. Accounts payable pertain to merchandise purchases.
Instructions
Prepare a statement of cash flows for the year using the direct method.

Solution
DRAKE COMPANY
Statement of Cash Flows
For the Year Ended December 31, 2012
Cash flows from operating activities
Cash receipts from customers ($450,000 – $22,000) $428,000
Cash payments:
To suppliers $270,000 (1)
For operating expenses 49,000 (2)
For income taxes 20,000
For interest 18,000 357,000
Net cash provided by operating activities 71,000
Cash flows from investing activities
Purchase of investments (25,000)
Purchase of plant assets (100,000)
Sale of plant assets 10,000
Net cash used by investing activities (115,000)
Cash flows from financing activities
Issuance of common stock 65,000
Payment of cash dividends (15,000)
Net cash provided by financing activities 50,000
Net increase in cash 6,000
Cash at beginning of period 35,000
Cash at end of period $ 41,000

Noncash investing and financing activities

Conversion of bonds payable into common stock $ 40,000

(1) Cost of goods sold $300,000

Deduct: Decrease in inventory (12,000)
Purchases 288,000
Deduct: Increase in accounts payable (18,000)
Cash payments to suppliers $270,000

(2) Operating expenses $60,000

Deduct: Decrease in prepaid expenses (6,000)
Deduct: Increase in accrued expenses payable (5,000)
Cash payments for operating expenses $49,000
Thanks