Cash flow information: Direct and indirect methods The comparative year-end bala
ID: 2444794 • Letter: C
Question
Cash flow information: Direct and indirect methods
The comparative year-end balance sheets of Sign Graphics, Inc., revealed the following activity in the company's current accounts:
20X5
20X4
Increase / Decrease)
Current assets
Cash
$55,400
$35,200
$20,200
Accounts receivable (net)
83,800
88,000
-4,200
Inventory
243,400
233,800
9,600
Prepaid expenses
25,400
24,200
1,200
Current liabilities
Accounts payable
$123,600
$140,600
($17,000)
Taxes payable
43,600
49,200
-5,600
Interest payable
9,000
6,400
2,600
Accrued liabilities
38,800
60,400
-21,600
Note payable
44,000
—
44,000
The accounts payable were for the purchase of merchandise. Prepaid expenses and accrued liabilities relate to the firm's selling and administrative expenses. The company's condensed income statement follows.
SIGN GRAPHICS INC.
Income Statement
for the Year Ended December 31, 20x5
Sales
$713,800
Less: Cost of goods sold
323,000
Gross profit
$390,800
Less: Selling & administrative expenses
$186,000
Depreciation expense
17,000
Interest expense
27,000
230,000
Add: gain on sale of land
$160,800
21,800
Income before taxes
$182,600
Income taxes
36,800
Net income
$145,800
Other data:
Long-term investments were purchased for cash at a cost of $74,600.
Cash proceeds from the sale of land totaled $76,200.
Store equipment of $44,000 was purchased by signing a short-term note payable. Also, a $150,000 telecommunications system was acquired by issuing 3,000 shares of preferred stock.
A long-term note of $49,400 was repaid.
Twenty thousand shares of common stock were issued at $5.19 per share.
The company paid cash dividends amounting to $128,600.
Instructions:
Prepare the operating activities section of the company's statement of cash flows, assuming use of:
The direct method.
The indirect method.
Prepare the investing and financing activities sections of the statement of cash flows.
20X5
20X4
Increase / Decrease)
Current assets
Cash
$55,400
$35,200
$20,200
Accounts receivable (net)
83,800
88,000
-4,200
Inventory
243,400
233,800
9,600
Prepaid expenses
25,400
24,200
1,200
Current liabilities
Accounts payable
$123,600
$140,600
($17,000)
Taxes payable
43,600
49,200
-5,600
Interest payable
9,000
6,400
2,600
Accrued liabilities
38,800
60,400
-21,600
Note payable
44,000
—
44,000
Explanation / Answer
Sign Graphics Statement of Cash Flows- Indirect Method 20X5 Cash Flows from Operating Activities Net Income $1,45,800 Add Expenses Not Requiring Cash: Depreciation $17,000 Other Adjustments: gain on sale of land -$21,800 Changes in working capital Add Reduction in Accounts Receivable $4,200 Subtract Increase in other current liabilities -$24,600 Subtract Decrease in Accounts Payable -$17,000 Subtract Increase in Inventory -$9,600 Subtract Increase in Prepaid Expenses -$1,200 Net Cash from Operating Activities $92,800 Cash Flows from Investing Activities Purchase of Long Term Investments -$74,600 Sale of Land $76,200 Purchase of New Equipment Other Net Cash Used for Investing Activities $1,600 Cash Flows from Financing Activities Repayment of Long Term Note -$49,400 Issue of shares 103800 Dividend payment -128600 Net Cash from Financing Activities -$74,200 NET INCREASE/(DECREASE) IN CASH $20,200 CASH, BEGINNING OF YEAR 35200 CASH, END OF YEAR $55,400 Sign Graphics Statement of Cash Flows- Direct Method 20x5 Cash Flows from Operating Activities Cash received from customers $7,18,000 Disbursements/payments Payments to Suppliers for Merchandise -$3,49,600 Payments for selling and administrative expenses -$2,08,800 Taxes paid -$42,400 Interest paid -$24,400 Total 'Disbursements/payments -$6,25,200 Net Cash from Operating Activities $92,800
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