Question

LO 2, 3, 4, 5 Statement of Cash Flows: Indirect Method P8. Shah Fabrics, Inc.'s comparative balance sheets for December 31, 2014 and 2013, follow RATIO 1 Net cash flows from operating activities $93.600 1: Net cash flows from investing Shah Fabrics, Inc. Comparative Balance Sheets December 31, 2014 and 2013 activities: (528,800 1: Net cash flows from financing activities: $204,000 2014 2013 Assets Cash $ 378,240 $ 109,440 Accounts receivable (net) 409,720 301,720 Inventory Prepaid expenses 451,560 551,560 80,000 Land 100,000 Building Accumulated depreciation-building 548,000 (60,000) Equipment 132,000 136,000 Accumulated depreciation-equipment (58,000) (96,000) 24,000 $1,106,720 Patents 16,000 $1,917,520 Total assets Liabilities and Stockholders' Equity $ 147,000 $ 43,000 Accounts payable Notes payable (current) 40,000 49,200 Accrued liabilities 648,000 Mortgage payable Common stock, $10 par value Additional paid-in capital Retained earnings Total liabilities and stockholders'equity 600,000 720,000 228,800 148,800 161,720 237,720 $1,106,720 $1,917,520 Additional information about Shah Fabrics' operations during 2014 is as follows: (a) net income, $112,000; (b) building and equipment depreciation expense amounts, $60,000 and S12,000, respectively; (c) equipment that cost $54,000 with accumulated depreciation of $50,000 sold at a gain of $21,200; (d) equipment purchases, $50,000; (e) patent amortization, $12,000; purchase of patent, $4,000; (f) funds borrowed by issuing notes payable, $100,000; notes payable repaid, $60,000; (g) land and building purchased for S648,000 by signing a mortgage for the total cost; (h) 6,000 shares of $40 par value common stock issued for a total of $200,000; and (i) paid cash dividend, $36,000. REQUIRED 1. Using the indirect method, prepare a statement of cash flows for Shah Fabrics. 2. ACCOUNTING CONNECTION Why did Shah Fabrics have an increase in cash of $268,800 when it recorded net income of only $112,000? Discuss and interpret. 3. BUSINESS APPLICATION Compute and assess cash flow yield and free cash flow for 2014. (Round to one decimal place.) What is your assessment of Shah Fabrics" cash-generating ability?

Answer 1

Shah Fabrics Inc. 112000 Statement of Cashflows For the period ending 31.12.2014 Cashflow from Operating Activity Net Income Adjustments: Depreciation Expense - Build Depreciation Expense - Equip. Gain on sale of Equipment Patent Amortization Increase in Accounts Receivable Decrease in Inventory Decrease in Prepaid Expenses Decrease in Accounts Payable Increase in Note Payable Decrease in Accued Liabilities Cash generated from Operating Activity 60000 12000 -21200 12000 - 108000 100000 80000 - 104000 40000 -49200 21600 133600 Cashflow from Investing Activity Equipment sold ( 54000-50000 + 21200) Equipment Purchased Patent Purchased Cash used for Investing Activity 25200 -50000 -4000 -28800 120000 80000 -36000 Cashflow from Financing Activity Common Stock issued Additional Paid in Capital Dividends Paid Cash generated from Financing Activity Net Increase in Cash Beginning Cash Balance Ending Cash Balance 164000 268800 109440 378240