Comparative balance sheet accounts of Sharpe Company are presented below. SHARPE

Question

Comparative balance sheet accounts of Sharpe Company are presented below.

SHARPE COMPANY COMPARATIVE BALANCE SHEET ACCOUNTS AS OF DECEMBER 31

Debit Balances 2014 2013

Cash $72,220 $51,140

Accounts Receivable 154,280 130,250

Inventory 74,530 61,600

Investments (Available-for-sale) 54,680 85,290

Equipment 70,820 48,280

Buildings 144,130 144,130

Land 39,790 25,980

Totals $610,450 $546,670

Credit Balances

Allowance for Doubtful Accounts $10,730 $8,990

Accumulated Depreciation—Equipment 21,660 14,050

Accumulated Depreciation—Buildings 37,990 28,490

Accounts Payable 66,700 60,990

Income Taxes Payable 12,500 10,290

Long-Term Notes Payable 62,180 70,440

Common Stock 310,710 260,910

Retained Earnings 87,980 92,510

Totals $610,450 $546,670

Additional data: 1. Equipment that cost $10,310 and was 60% depreciated was sold in 2014.

2. Cash dividends were declared and paid during the year.

3. Common stock was issued in exchange for land.

4. Investments that cost $35,130 were sold during the year.

5. There were no write-offs of uncollectible accounts during the year.

Sharpe’s 2014 income statement is as follows.

Sales revenue $959,320

Less: Cost of goods sold 608,550

Gross profit 350,770

Less: Operating expenses (includes depreciation expense and bad debt expense) 252,480

Income from operations 98,290

Other revenues and expenses:

Gain on sale of investments $15,920

Loss on sale of equipment (3,210 ) 12,710

Income before taxes 111,000

Income taxes 45,370

Net income $65,630

(a) Compute net cash provided by operating activities under the direct method. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

(b) Prepare a statement of cash flows using the indirect method.

Explanation / Answer

Sharpe Company All Amounts in $ (a) Net Cash Flows from Operating Activities (Direct Method) Collectjons from Debtors Sales - Increase in Accounts Receivable (Net of Provision for Doubtful Accounts) = $ 959,320 + ($ 130,250 - $ 8,990) - ($ 154,280 - $ 10,730) = $ 959,320 + $ 121,260 - $ 143,550 = 937030 $ Payments to Accounts Payable Cost of Goods Sold + Increase in Inventory - Increase in Accounts Payable = $ 608,550 + $ 74,530 - $ 61,600 + $ 60,990 - $ 66,700 = 615770 $ Payments for Expenses = Operating Expenses = $ 252,480 Thus, Cash Flows from Operating Activities = $ 937,030 - $ 615,770 - $ 252,480 = 68780 $ (b) Cash Flows using Indirect Method Cash Flows from Operating Activities Depreciation Expense = Closing Accumulated Depreciation - (Opening Accumulated Depreciation - Depreciation on Sale) = ($ 21,660 + $ 37,990) - ($ 14,050 + $ 28,490 - ($ 10,310 X 60%)) = 23296 $ Net Income per Income Statement 65630 Add : Depreciation Expense 23296 Add : Bad Debt Expense 1740 Less : Gain on Sale of Investments -15920 Add : Loss on Sale of Equipment 3210 Add : Income Taxes 45370 57696 Cash Flows before Working Capital changes 123326 Less : Increase in Accounts Receivable -22290 Less : Increase in Inventory -12930 Add : Increase in Accounts Payable 5710 Add : Increase in Income Taxes Payable 2210 -27300 Cash Inflows from Operating Activities 96026 Cash Flows from Investing Activities Sale of Investments 51050 Purchase of Investments -9520 Sale of Equipment 914 Purchase of Equipment -32850 Issue of Stock for Land 0 9594 Cash Flows from Financing Activities Issue of Stock 35990 Income Taxes Paid -45370 Repayment of Long Term Notes -8260 Cash Dividends Paid -66900 -84540 Net Cash Inflows during the year 21080 Opening Cash and Cash Equivalents 51140 Closing Cash and Cash Equivalents 72220

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