Required: Prepare a Statement of Cash Flows using the direct method for operatin

Question

Required: Prepare a Statement of Cash Flows using the direct method for operating activities. Assume that all purchases and sales of inventory are on account, and that there are no anticipated bad debts for accounts receivable.

TIP: Use T accounts for the pertinent items to isolate the information for the statement

Presented below are the 2011 income statement and comparative balance sheet for Siegfried & Royce. Siegfried & Royce Income Statement For the Year Ended December 31, 2011 ($ in thousands) Sales revenue $12,500 Operating expenses: Cost of goods sold 7300 Depreciation 400 Rent 250 Administrative and other   2200        Total operating expenses 10,150 Income before income taxes 2,350 Income tax expense 940 Net income $1,410 Balance Sheet information ($ in thousands) Dec. 31, 2011 Dec. 31, 2010 Assets: Cash   $3,280 $1,300 Accounts receivable 1,250 980 Inventory 980 900 Prepaid rent 150 100 Plant & equipment 3,000 2,600     Less: Accumulated depreciation -1,200 -800            Total assets $7,460 $5,080 Liabilities and shareholders’ equity: Accounts payable $500 $580 Payables for administrative and other expenses 650 700 Income taxes payable 450 350 Note payable (due 12/31/2012) 2,500 2,000 Common stock 1,500 1,000 Retained earnings 1,860 450           Total liabilities and shareholders’ equity $7,460 $5,080

Explanation / Answer

The cash flow statement under direct method is as under:

$ 980

Cash flow from operating Activities: Cash received from customers $                   12,230 Cash paid to suppliers $                   (7,460) Cash payment for administrative and other expenses $                   (2,250) Income tax payment $                      (840) Payment for rent $                      (300) Net cash from operating activities $        1,380 Cash flow from investing activities Purchase of plant and equipment $                      (400) Net cash used in investing activities $         (400) Cash flow from financing activities Proceeds from issuance of common stock $                         500 Proceeds from issuance of debt $                         500 Net cash used in financing activities $        1,000 Net increase in cash and cash equivalents $        1,980 Cash balance as on 31st Dec. 2010 $        1,300 Net increase in cash and cash equivalents $        1,980 Cash balance as on 31st Dec. 2011 $        3,280

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