Sophos, Inc. prepared a B/S at Dec. 31, 2004. The following occurred during 2005

Question

Sophos, Inc. prepared a B/S at Dec. 31, 2004. The following occurred during 2005. $25,000 in cash and a $35,000 note payable were exchanged for land valued at $60,000. Bonds payable (maturing 2009) in the amount of $20,000 were retired by paying $18,000 cash. Common shares in the amount of $50,000 were issued. The company sold surplus equipment, with a book-value of $ 14,000 for $ 18,000. Net income was $31,000 Cash dividends of $2,500 were paid. 100 C/S (considered short-term investments) were purchased for $8,300. A new building was acquired through the issuance of $50,000 in bonds. $8,000 of depreciation was recorded on the plant and equipment. At Dec. 31, 2005. Cash was S87.200. A/R had a balance of $30,000, Inv had increased to $82,000 and A/P had fallen to $12,000. LT investments and Taxes payable were unchanged from 2004. Required: Prepare a statement of cash flows for 2005 using the indirect method. (10 marks) Prepare a B/S for Sophos, Inc at Dec 31, 2005.

Explanation / Answer

a) Statement of Cash Flow - Indirect Method Cash flow from operating activity Net Income 31000 Add: Depriciation 8000 Increase in Notes payable 35000 43000 less : Increase in A/R 3000 Increase in CFI 8300 Dexrease in A/P 5000 16300 Net cash flow from operating activities 57700 Cash flow from investing activity Proceeds from sale of equipment 14000 Less Purchase of land 60000 Purchase of building 50000 110000 Cash flow from investing activity -96000 Cash flow from financing activity Proceeds from sale issue of C/S 50000 Increase in Bonds payable 28000 Less : Dividends paid 2500 Cash flow from financing activity 75500 Total cash flow 37200 Opening balance of cash 50000 closing balance of cash 87200 Movement of cash 37200 b) Balance sheet as on 2005 2004 2005 Increase/ Decrease Cash 50000 87200 37200 A/R 27000 30000 3000 Inv 80000 82000 2000 CFI 8300 8300 L T Investments 10000 10000 0 Land 32000 92000 60000 Plant & equipment (ne) 91000 69000 -22000 Building 50000 50000 Total Assets 290000 428500 138500 A/P 17000 12000 -5000 Taxes PAYABLE 3000 3000 0 Bonds Payable 100000 130000 30000 Notes Payable 35000 35000 C/S 75000 125000 50000 R/E 95000 123500 28500 290000 428500 138500 Working entries `1. Land Dr 60000               Cash Cr 25000                Notes Payable Cr 35000 2, BonDS Payable Dr 20000                 Cash   Cr 18000                 R/E Cr 2000 3. Cash Dr 50000            C/S Cr 50000 4. Cash Dr 18000             Equipment Cr 14000                R/E Cr 4000 6. r/e Dr 2500          Cash Cr 2500 7. CFI Dr 8300           Cash Cr 8300 8. Buildings Dr 50000               Bonds Cr 50000

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