Question

Statement of Cash Flows (Direct Method)

The Forrester Company’s income statement and comparative balance sheets as of December 31 of 2019 and 2018 are shown below:

FORRESTER COMPANY Income Statement For the Year Ended December 31, 2019
Sales Revenue		$660,000
Cost of Goods Sold	$376,000
Wages Expense	107,000
Depreciation Expense	22,000
Rent Expense	28,000
Income Tax Expense	24,000	557,000
Net Income		$103,000

FORRESTER COMPANY Balance Sheets
	Dec. 31, 2019	Dec. 31, 2018
Assets
Cash	$58,000	$30,000
Accounts Receivable	52,000	60,000
Inventory	142,000	120,000
Prepaid Rent	16,000	10,000
Plant Assets	420,000	301,000
Accumulated Depreciation	(127,000)	(105,000)
Total Assets	$561,000	$416,000
Liabilities and Stockholders’ Equity
Accounts Payable	$29,000	$17,000
Wages Payable	14,000	9,000
Income Tax Payable	7,000	8,000
Common Stock	295,000	252,000
Paid-in-Capital in Excess of Par Value	72,000	58,000
Retained Earnings	144,000	72,000
Total Liabilities and Stockholders’ Equity	$561,000	$416,000

Cash dividends of $31,000 were declared and paid during 2019. Plant assets were purchased for cash and additional common stock was issued for cash. Accounts payable relate to merchandise purchases.

Required

a. Compute the change in cash that occurred during 2019.
b. Prepare a statement of cash flows using the direct method.
c. Compute free cash flow.
d. Compute the operating‑cash‑flow‑to‑current‑liabilities ratio.  
e. Compute the operating‑cash‑flow‑to‑capital‑expenditures ratio.

a. Change in Cash during 2019 $Answer

AnswerIncreaseDecrease

b. Use a negative sign with cash outflow answers.

RURAL COMPANY Statement of Cash Flows For Year Ended December 31, 2019
Cash Flow from Operating Activities
Cash Received from Customers		Answer
Cash Paid for Merchandise Purchased	Answer
Cash Paid to Employees	Answer
Cash Paid for Rent	Answer
Cash Paid for Income Taxes	Answer	Answer
Cash Provided by Operating Activities		Answer
Cash Flow from Investing Activities
Purchase of Plant Assets		Answer
Cash Flow from Financing Activities
Issuance of Common Stock	Answer
Payment of Dividends	Answer
Cash Provided by Financing Activities		Answer
Net Change in Cash		Answer
Cash at Beginning of Year		Answer
Cash at End of Year		Answer

c. Free cash flow $Answer

d. Operating-cash-flow-to-current-liabilities ratio.
Round answer to two decimal places.
Answer

e. Operating-cash-flow-to-capital-expenditures ratio.
Round answer to two decimal places.

Answer 1

Answer is given below

a) Change in Cash occurred during the period $28,000 Amount $668,000 ($386,000) ($102,000) ($34,000) ($25,000) $121,000 Cash Flow Statement under Direct method Cash flows from Operating Activities A Cash received from customers B Cash paid to suppliers C Cash Paid to employees D Cash paid for operating expenses E Cash paid for Income taxes Net Cash provided by Operating Activities Cash flows from Investing Activities New plant purchased Net Cash provided by Investing Activities Cash flows from Financing Activities Dividends paid Common shares raised during the year Net Cash provided by Financing Activities Net Cash inflow/(outflow) Opening balance of cash Closing balance of cash ($119,000) ($119,000) ($31,000) $57,000 $26,000 $28,000 $30,000 $58,000 c) Free Cash flows Net cash provided by Operating Activities Less: Fixed Assets purchased Free Cash flows $121,000 ($119,000) $2,000 Operating cash flow to Current Liabilities ratio Operating cash flow Current Liabilities $121,000 $50,000 Ratio 2.42 Operating cash flow to Capital expenditures ratio Operating cash flow Capital expenditure Ratio $121,000 $119,000 1.02 Working notes: A Cash received from customers Sales Add: Decrease in Accounts receivable Net cash received from customers $660,000 $8,000 $668,000 Cash paid to suppliers Cost of Sales Add : Increase in inventory cost of purchase $376,000 $22,000 $398,000 cost of purchase Less: Increase in payable Net payment to suppliers $398,000 $12,000 $386,000 Cash Paid to Employees Wages expense Less: Increase in salaries payable Net cash paid to Employees $107,000 $5,000 $102,000 Cash paid for operating expenses Rent expense Add: increase in prepaid rent cash payments for operating expenses $28,000 $6,000 $34,000 Cash paid for Income tax Income tax Add: Decrease in income tax payable cash paid for income tax $24,000 $1,000 $25,000