Question

QUESTION 5 (PB12-3)

The financial statements for CT Consulting Inc., a sister company to Cocao Excavating Inc. has is year-end on December 31, 2018 They are almost complete, except for the statement of cash flows. The completed Statement of Financial Position and Statement of Comprehensive Income are summarized below:

	2020	2019
Statement of Financial Position
Property and Equipment	$2,100,000	$1,500,000
Less: Accumulated Depreciation	(600,000)	(450,000)
Inventory	220,000	200,000
Accounts Receivable	150,000	200,000
Cash	630,000	650,000
	$2,500,000	$2,100,000
Notes Payable Long-Term	$600,000	$750,000
Wages Payable	20,000	10,000
Accounts Payable	80,000	190,000
Contributed Capital	1,000,000	700,000
Retained Earnings	800,000	450,000
	$2,500,000	$2,100,000
Statement of Comprehensive Income
Revenues	$1,900,000
Cost of Sales	900,000
Other Expenses	600,000
Net Income	$400,000

Notes to the Financial Statements:

1. Bought equipment for cash, $600,000
2. Paid $150,000 on the long-term note payable
3. Issued new shares for $300,000 cash
4. Dividends of $50,000 were paid in cash
5. Other expenses included deprecation, 150,000; wages, $200,000;taxes,250,000
6. Accounts Payable includes only inventory purchases made on credit. Because a liability relating does not exist, assume that taxes were fully paid in cash.

REQUIRED:

1. Prepare the statement of cash flows for the ended December 31, 2018, using the indirect method.
2. Evaluate the statement of cash flows.

Answer 1

Solution

CT Consulting Inc.
Statement of Cash Flows
For the Year Ended December 31, 2020
A. Cash Flows from Operating Activity
Net Income		$     400,000.00
Adjustments to reconcile net income to net cash flow from operating activities:
Depreciation expense	$    150,000.00
Changes in current operating assets and liabilities:
Increase in Inventory	$    (20,000.00)
Decrease in Accounts Receivables	$      50,000.00
Decrease in Accounts Payable	$ (110,000.00)
Increase in wages payable	$      10,000.00
		$       80,000.00
Net cash flow from Operating activities		$     480,000.00
B. Cash flows from Investing Activities
Purchase of Equipment	$ (600,000.00)
Net Cash flows from Investing activities		$   (600,000.00)
C. Cash Flows from Financing activities
Issue of Common stock	$    300,000.00
Payments of dividends	$    (50,000.00)
Repayment of Notes payable	$ (150,000.00)
Cash flows from Financing activities		$     100,000.00
Net Increase (Decrease) in Cash [A+B+C]		$     (20,000.00)
Cash at the beginning		$     650,000.00
Cash at the end		$     630,000.00

The cash generated by the company is more than its net income. The company has raised capital to repay its loan and rest money is used to buy net equipment which indicates that the company is expanding.