Question

The Diversified Portfolio Corporation provides investment advice to customers. A condensed income statement for the year ended December 31, 2021, appears below: points Service revenue Operating expenses Income before income taxes Income tax expense Net income $1,180,000 840,000 340,000 85,000 $ 255,000 eBook The following balance sheet information also is available: Print Cash Accounts receivable Accrued liabilities (for operating expenses) Income taxes payable 12/31/2021 12/31/2020 $ 452,000 $ 84,000 148,000 114,000 98,000 74,000 24,000 43,000 In addition, the following transactions took place during the year: 1. Common stock was issued for $128,000 in cash. 2. Long-term investments were sold for $64,000 in cash. The original cost of the investments also was $64,000. 3. $94,000 in cash dividends was paid to shareholders. 4. The company has no outstanding debt, other than those payables listed above. 5. Operating expenses include $44,000 in depreciation expense. Required: 1. Prepare a statement of cash flows for 2021 for the Diversified Portfolio Corporation. Use the direct method for reporting operating activities. 2. Prepare the cash flows from operating activities section of Diversified's 2021 statement of cash flows using the indirect method.

Answer 1

(1) Direct Method :-

Cash Flow from operating Activities
Cash Received from customers ($1180000{service revenue} - $34000{increase Ac rec})	$1146000
Cash paid for operating exp ($840000 - $24000{increase accrued liabilities} - $44000{depreciation)	($772000)
Cash paid for Income Tax ($85000 + $19000{decrease income tax payable})	($104000)
Cash Flow from operating Activities		$270000
Cash Flow from Investing Activities:
Sale of Long term investment	$64000
Cash Flow from Investing Activities:		$64000
Cash Flow from Financing Activities:
Issued common stock	$128000
Cash paid for dividend	($94000)
Cash Flow from Financing Activities:		$34000
Net cash provided (used) by all activities		$368000
Beginning cash Balance		$84000
Ending Cash Balance		$452000

(2) Indirect Method :-

Cash Flow from operating Activities
Net Income	$255000
Depreciation	$44000
Increase Account receivable	($34000)
Increase accrued liabilities	$24000
Decrease Income Tax payable	($19000)
Cash Flow from operating Activities		$270000
Cash Flow from Investing Activities:
Sale of Long term investment	$64000
Cash Flow from Investing Activities:		$64000
Cash Flow from Financing Activities:
Issued common stock	$128000
Cash paid for dividend	($94000)
Cash Flow from Financing Activities:		$34000
Net cash provided (used) by all activities		$368000
Beginning cash Balance		$84000
Ending Cash Balance		$452000