Question

prepare cash flow statement

PROBLEM 2-7 The financial statements for the JHJ Book Store are as follows: INCOME STATEMENT 2013 3,000,000 2.500.000 500,000 Sales Cost of Books Sold Gross Profit Operating Expenses Depreciation Gain on sale of land Net Income 250,000 50.000 300,000 400.000 600.000 BALANCE SHEET 2013 Cash Accounts Receivable Inventory Equipment Accumulated Depreciation Land Total Assets 2012 100,000 125,000 150,000 100,000 (25,000) 100,000 550.000 2013 300,000 200,000 350,000 450,000 (75,000) 1.225.000 Accounts Payable Long Term Bond Payable Total Liabilities 100,000 100,000 200,000 250,000 50.000 300.000 Common Stock Retained Earnings Total Stockholders 50,000 300,000 350,000 125.000 800.000 925.000 Total Liabilities + Stockholders Equity 550.000 1.225,000 Required: Prepare Statement of Cash Flows

Answer 1

In calculating the cash flows statement from indirect method, we will start with the net income. We will add back the non cash item of depreciation & deduct gain on sale of equipment in it. Then we will adjust the amount for increase or decrease in cash due to increase or decrease in current assets or current liabilities.Like, an increase in current assets will reduce cash, so we will deduct it and a decrease in current assets will increase cash, so we will add it. Similarly, an increase in current liabilities will increase cash, so it will be added and a decrease in current liabilities will reduce cash, so it will be deducted. Before proceeding with the cash flow statement, we will check for certain adjustments given as below:

(1) Dividend paid calculation:

Beginning retained earnings: $300000

Add: Net income : $600000

Less: Ending retained earnings: ($800000)

Dividend paid : $100000

Statement of cash flows for the year ending 2013:

Description	Amount	Amount
Operating cash flows:
Net income	$600000
Adjustments to reconcile net income to net cash from operating activities
Add: Depreciation	$50000
Less: Gain on sale of land	($400000)
Less: Increase in accounts receivable	($75000)
Less: Increase in inventory	($200000)
Add: Increase in accounts payable	$150000
Cash flows from operating activities		$125000
Investing activities:
Purchase of equipment	($350000)
Proceeds from sale of land	$100000
Cash flows from investing activities		($250000)
Financing activities:
Proceeds from issue of common stock	$75000
Dividends paid	($100000)
Repayment of long term bond	($50000)
Cash flows from financing activities		($75000)
Net cash flows from financing activities		$200000
Beginning cash balance		$100000
Ending cash balance		$300000