Question

Forten Company, a merchandiser, recently completed its calendar-year 2017 operations. For the year, (1) all sales are credit sales, (2) all credits to Accounts Receivable reflect cash receipts from customers, (3) all purchases of inventory are on credit, (4) all debits to Accounts Payable reflect cash payments for inventory, and (5) Other Expenses are paid in advance and are initially debited to Prepaid Expenses. The company’s income statement and balance sheets follow.

FORTEN COMPANY Comparative Balance Sheets December 31, 2017 and 2016
	2017				2016
Assets
Cash	$	54,400			$	76,500
Accounts receivable		70,310				53,625
Inventory		280,156				254,800
Prepaid expenses		1,280				2,005
Total current assets		406,146				386,930
Equipment		154,500				111,000
Accum. depreciation—Equipment		(38,125	)			(47,500	)
Total assets	$	522,521			$	450,430
Liabilities and Equity
Accounts payable	$	56,141			$	119,175
Short-term notes payable		10,900				6,600
Total current liabilities		67,041				125,775
Long-term notes payable		63,500				51,750
Total liabilities		130,541				177,525
Equity
Common stock, $5 par value		168,750				153,250
Paid-in capital in excess of par, common stock		40,500				0
Retained earnings		182,730				119,655
Total liabilities and equity	$	522,521			$	450,430

  

FORTEN COMPANY Income Statement For Year Ended December 31, 2017
Sales				$	597,500
Cost of goods sold					288,000
Gross profit					309,500
Operating expenses
Depreciation expense	$	23,750
Other expenses		135,400			159,150
Other gains (losses)
Loss on sale of equipment					(8,125	)
Income before taxes					142,225
Income taxes expense					28,450
Net income				$	113,775

Additional Information on Year 2017 Transactions

1. The loss on the cash sale of equipment was $8,125 (details in b).
2. Sold equipment costing $55,875, with accumulated depreciation of $33,125, for $14,625 cash.
3. Purchased equipment costing $99,375 by paying $36,000 cash and signing a long-term note payable for the balance.
4. Borrowed $4,300 cash by signing a short-term note payable.
5. Paid $51,625 cash to reduce the long-term notes payable.
6. Issued 2,800 shares of common stock for $20 cash per share.
7. Declared and paid cash dividends of $50,700.

Required:
1. Prepare a complete statement of cash flows; report its operating activities using the indirect method.

Answer 1

Solution

FORTEN COMPANY
Cash Flow Statement
For the ended December 31, 2017
Cash Flow from Operating Activities:
Net Income	$     113,775.00
Adjustments to reconcile net income to net cash provided by operations:
Loss on sale of Equipment	$          8,125.00
Depreciation expense	$        23,750.00
Increase in Accounts receivables	$     (16,685.00)
Increase in Inventory	$     (25,356.00)
Decrease in prepaid expense	$              725.00
Decrease in accounts payable	$     (63,034.00)
A. Cash Flow from Operating Activities		$         41,300.00
Cash Flow from Investing Activities:
Sale of Equipment	$        14,625.00
Purchase of Equipment	$     (36,000.00)
B. Cash flow from Investing Activities		$       (21,375.00)
Cash Flow from Financing Activities:
Issue of Common Stock	$        56,000.00
Dividend paid	$     (50,700.00)
Proceeds from short term notes payable	$          4,300.00
Retirement of long term notes payable	$     (51,625.00)
C. Cash Flow from Financing Activities		$       (42,025.00)
Increase (Decrease) in cash [A+B+C]		$       (22,100.00)
Add: cash at the beginning of the year		$         76,500.00
Cash at the end of the year		$         54,400.00

.General notes for cash flow
Cash is increased when Current liability increase or Current asset Decrease.
Cash is Decreased when Current liability Decrease or Current asset Increase.
Depreciation or loss on sale of any asset is a non cash expense hence it will be added to net income to get operating cash
Profit on sale of asset or investment is a non cash profit and hence will be deducted from operating income.