Question

**Prepare a statement of cash flow, using the direct method and separately, the indirect method of reporting cash flows from operating activities:

The comparative balance sheets of Posner Company, for Years 1 and 2 ended December 31, appear below in condensed form:

Cash	Year 2 $ 53,000	Year 1 $ 50,000
Accounts receivable (net)	37,000	48,000
Inventories	108,500	100,000
Investments	—	70,000
Equipment	573,200	450,000
Accumulated depreciation—equipment	(142,000)	(176,000)
	$629,700	$542,000
Accounts payable	$ 62,500	$ 43,800
Bonds payable, due Year 2	—	100,000
Common stock, $10 par	325,000	285,000
Paid­in capital in excess of par—common stock	80,000	55,000
Retained earnings	162,200	58,200
	$629,700	$542,000
The income statement for the current year is as follows:
Sales		$625,700
Cost of merchandise sold		340,000
Gross profit Operating expenses: Depreciation expense	$ 26,000	$285,700
Other operating expenses	68,000	94,000
Income from operations Other income: Gain on sale of investment	$   4,000	$191,700
Other expense: Interest expense	6,000	(2,000)
Income before income tax		$189,700
Income tax		60,700
Net income		$129,000

Additional data for the current year are as follows:

1. Fully depreciated equipment costing $60,000 was scrapped, no salvage, and new equipment was purchased for $183,200.
2. Bonds payable for $100,000 were retired by payment at their face amount.
3. 5,000 shares of common stock were issued at $13 for cash.
4. Cash dividends declared and paid, $25,000.

Answer 1

Statement of Cash Flows (Direct Method) Cash flow from Operating Activities: Cash Received from Customers Cash payments for merchandise Cash payments for operating expenses Cash payments for Interest Expense Cash payments for Income taxes 636700 -329800 -68000 -6000 -60700 Cash provided by Operating activities 172200 Cash flow from Investing Activities: Sale of Investment (70000 + 4000) Purchase of Equipment 74000 -183200 Cash used in Investing Activities -109200 Cash flow from Financing Activities: Cash dividends paid Bonds payable paid off Proceeds from Issuance of Common Stock -25000 -100000 65000 Cash provided by Financing Activities -60000 Net Increase in Cash Cash, Beginning Balance Cash, Ending Balance 3000 50000 53000

Cash received from Customers = Sales in Income Statement + Decrease in Accounts receivables

Cash payments for Merchandise = Cost of merchandise sold in income statement + Increase in Inventories - Increase in Accounts payable

Sale Value of Investment = Decrease in Investment + Gain on sale

Statement of Cash Flows (Indirect Method) Cash flow from Operating Activities: Net Income 129000 Adjustements to reconcile net income Depreciation expense Gain on sale of investment Decrease in Accounts Receivable Increase in inventories Increase in Accounts payable 26000 -4000 11000 -8500 18700 43200 Net cash flow from operating activities 172200