Other information is as follows: Dividends of $60,000 were declared and paid dur

Question

Other information is as follows: Dividends of $60,000 were declared and paid during the year. Operating expenses include $50,000 of depreciation. Land and plant and equipment were acquired for cash, and additional stock was issued cash. Cash also was received from additional bank loans. Prepare a statement of cash flows for 2014 using the direct method in the Operating Activities section. On the basis of your statement in part (1), draft a brief memo to the president to explain why cash decreased during such a profitable year. Include in your explanation any recommendations for improving the company's cash flow in future years. Refer to all of the facts in Problem 12-3.

Explanation / Answer

(Problem 12-3)

(1) Statement of Cash Flows

NOTE: Out of 2 questions, the first question is answered.

CASH FLOW FROM OPERATING ACTIVITIES $ Net Income 2,25,000 Add: Depreciation 50,000 Add: Increase in Current Liabilities       Other Accrued Liabilities 5,000 Less: Increase in Current Assets      Accounts receivables -50,000      Inventory -30,000 Less: Decrease in Current Liabilities     Accounts Payable -18,000     Income Tax Payable -20,000 Add: Decrease in Current Assets     Prepayments 10,000 NET CASH FLOW FROM OPERATING ACTIVITIES (1) 1,72,000 CASH FLOW FROM INVESTING ACTIVITIES $ Acquisition of Land -1,50,000 Acquisition of Plant & Machinery -2,00,000 NET CASH FLOW FROM INVESTING ACTIVITIES (2) -3,50,000 CASH FLOW FROM INVESTING ACTIVITIES $ Dividend Paid -60,000 Increase in Long-Term Bank Loan 50,000 Increase in Common Stock 1,50,000 NET CASH FLOW FROM FINANCING ACTIVITIES (3) 1,40,000 NET CASH INFLOW/(OUTFLOW) DURING YEAR (1) + (2) + (3) -38,000 Beginning Cash Balance (2013) 90,000 Ending Cash balance (2014) 52,000 NET CASH INFLOW/(OUTFLOW) DURING YEAR -38,000

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