Chapter 12 Case Study Problem The Carpet Company\'s 2014 and 2015 balance sheets

Question

Chapter 12 Case Study Problem The Carpet Company's 2014 and 2015 balance sheets included the following items December 31 2015 2014 Debits Cash Accounts receivable Merchandise inventory Equipment $10,500 4,000 9,000 21,000 18,000 18,000 5,000 $57 500 $46,000 8,000 Totals Credits Accumulated depreciation, equipment Accounts payable Taxes payable Dividends payable Common stock, $10 par value Contributed capital in excess of par, common stock Retained earnings $ 4,000 3,000 5,000 2,000 7,000 1,000 1,500 27,000 25,000 5,000 6,000 $57.500 $46,000 6,000 11,000 Totals The Carpet Company's income statement was as follows CARPET COMPANY Income Statement For the Year Ended December 31, 2015 $61,000 Sales Cost of goods sold Wages and other operating expenses Income taxes expense Depreciation expense Net income $40,000 6,300 4,200 1.500 52.000 $ 9,000 Required Prepare the statement of cash flows under the indirect method for the year ended December 31, 2015. Additional information includes the following a. Equipment costing $3,500 was purchased during the year b. Fully depreciated equipment that cost $500 was discarded and its cost and accumulated depreciation were removed from the accounts c. Two hundred shares of stock were sold and issued at $15 per share d. The company declared $4,000 of cash dividends and paid $2,500

Explanation / Answer

Notes:

-Purpose off cash flow statement is to matching of opening cash with the closing cash balance. So, all non cash expenses should be added back and they do not reflect the actual cash payments. like depreciation and provision of tax.

- Dividend actually paid will be taken into account as Declaration of dividend will not affect the cash ouflow.

- Asset disposed shall not have any affect on cash flow as no cash is realized during disposition of assets.

- Actual tax paid is calculated as below:

  

Carpet Company Cash flow statement Particulars Amount (in $) Profit As per Income Statement 9000 Add: Non cash Expenses Depreciation for the year 1500 Provision for taxation 5200 Cash Profit 15700 Cash flow from operating Activities Add: Increase in Current Liabilities & Decrease in Current assets Account Payable (7000-5000) 2000 Account receivable (8000-9000) 1000 Less: Decrease in Current Liabilities & increase in Current assets Merchandise Inventory (21000-18000) 3000 Total 13700 Less: Taxes Paid 5200 Cash flow from operating activities (A) 8500 Cash flow from Investing Activities Purchase of Equipment -3500 Cash flow from Investing Activities (B) -3500 Cash flow from Financing Activities Increase in contributed Capital (6000-5000) 1000 Issue of Common Stock (200*10) 2000 Dividend paid -2500 Increase in retained Earning 1000 Cash flow from Financing Activities © 1500 Cash flow business activities (A+B+C) 6500 Opening cash flow 4000 Closing Cash Flow statement 10500

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