Question

Question 4 (18 marks; 27 minutes) Patrick Company Comparative Statement of Financial Position December 31 2009 Cash $ 43,000 Accounts receivable, net 35,000 Inventory 114,000 Land 120,000 200,000 Accumulated amortization (50,000) Equipment 1,030,000 Accumulated amortization (118,000) $1,374,000 2008 $ 24,000 38,000 82,000 190,000 200,000 (40,000) 600.000 (94,000) $1.000.000 Building Accounts payable $ 115,000 $ 100,000 Bonds payable 320,000 -O- Common shares 750,000 750,000 Retained earnings 189,000 150,000 $1,374,000 $1.000.000 Additional Data: Net income for the year amounted to $84,000. 2. Cash dividends were paid amounting to $45,000. 3. Land was sold for $80,000. 4. Patrick sold equipment, which cost $150,000 and had accumulated amortization of $60,000, for $70,000. Required: 1) Prepare a statement of cash flows for 2009 using the indirect method. 2) Explain why the direct method is considered more useful information to the reader.

Answer 1

1.

Patrick Company
Statement of Cash Flows
For the Year Ended December 31, 2009
Cash flows from Operating Activities:
Net income		84000
Adjustments to reconcile net income to net cash provided by operations:
Amortization expense for building ($50000 - $40000)	10000
Amortization expense for equipment [$118000 - ($94000 - $60000)	84000
Gain on sale of land [$80000 - ($190000 - $120000)]	-10000
Loss on sale of equipment [$70000 - ($150000 - $60000)]	20000
Decrease in Accounts Receivable	3000
Increase in Inventory	-32000
Increase in Accounts payable	15000	90000
Net cash provided by operating activities		174000
Cash flows from Investing Activities:
Sale proceeds from land	80000
Sale proceeds from equipment	70000
Purchase of equipment [$1030000 - ($600000 - $150000)]	-580000
Net cash used by investing activities		-430000
Cash flows from Financing Activities:
Issuance of bonds payable	320000
Payment of cash dividends	-45000
Net cash provided by financing activities		275000
Net increase in cash		19000
Beginning cash balance		24000
Ending cash balance		43000

2. The direct method of cash flow is considered to provide more useful information to the reader than the indirect method because the direct method provides a clear listing of the various cash receipts and cash payments under the operating activities section. It clearly lists out cash receipts from customers, cash payments for inventories, employee salaries, income taxes, etc. unlike the indirect method.