Question

P23-4B (L02,3,4) (SCF—Direct Method) Wizard Company had available at the end of 2017 the information shown below.

WIZARD COMPANY

COMPARATIVE BALANCE SHEETS AS OF DECEMBER 31, 2017 AND 2016

2017 2016

Cash   $ 2,000 $ 12,000

Short-term investments 31,500 40,000

Account Receivable 95,600 90,000

Inventory 15,600 26,000

Prepaid Expenses Land 200,000 260,000

Buildings 650,000 650,000   

Accounts receivable 60,000 50,800

Accumulated depreciation-buildings (75,000) (57,000)

Equipment 346,000 150,000

Accumulated depreciation-equipment (41,000) 0

Patents 68,000 72,000

Total assets $1,370,700 $1,293,800

Accounts payable 81,000 86,900

Income taxes payable 26,800 21,000

Salaries and wages payable –0– 8,000

Notes payable, short-term 25,000 25,000

Long-term notes payable 50,000 75,000

Bonds payable 600,000 600,000

Discount on bonds payable (36,015) (40,865)

Common stock 110,000 100,000

Paid-in capital in excess of 248,600 216,800

par-common stock

Retained earnings 265,315 201,965

Total liabilities and stockholders’ equity   $1,370,700 $1,293,800

WIZARD COMPANY

INCOME STATEMENT AND DIVIDEND INFORMATION

FOR THE YEAR ENDED DECEMBER 31, 2017

Sales revenue $1,560,000

Cost of goods sold 976,000

Gross margin 584,000

Operating expenses Selling expenses $160,800

Administrative expenses 116,100

Depreciation/Amortization expense 63,000

Total operating expenses 339,900

Income from operations 244,100

Other revenues/expenses

Gain on sale of land 21,000

Loss on sale of short-term investment (8,000)

Dividend revenue 4,100

Interest expense (95,350) (78,250)

Income before taxes 165,850

Income tax expense 62,500

Net income 103,350

Dividends to common stockholders (40,000)

To retained earnings $ 63,350

Instructions:

Prepare a statement of cash flows for Wizard Company using the direct method accompanied by a reconciliation schedule. Assume the short-term investments are classified as available-for-sale.

Answer 1

Answer: Before preperation of Cash Flows fro Wizard Company, we have prepared Income Statement to be used for reconciliation schedule.

		INCOME STATEMENT FOR THE YEAR
TO COST OF GOODS SOLD			976000	BY SALES			1560000
TO GROSS MARGIN			584000
			1560000				1560000
TO OPERATING EXP			339900	BY G/M			584000
TO OPERATING INCOME			244100
			584000				584000
TO LOSS			8000	BY OP INC			244100
TO IMTEREST			95350	BY GAIN			21000
TO INCOME TAX			62500	BY DIVIDEND			4100
TO DIVIDEND			40000
			205850
TO RETAINED EARNING			63350
			269200.00				269200

	CASH FLOW STATEMENT FOR WIZARD COMPANY.
	FOR THE YEAR ENDED 2017
CASH FLOW FROM OPERATING ACTIVITIES						244100
ADD DEPRECIATION EXP.						63000
INCREASE IN ACCOUNTS RECEIVABLE						-5600
DECREASE IN SHORT TERM INVESTMENT						500
DECREASE IN INVENTORY						10400
INCREASE IN ACCOUNTS RECEIVABLE						-9200
DECREASE IN ACCOUNTS PAYABLE						-6200
DECREASE IN OUTSTANDING WAGES						-8000
	CASH PROVIDED IN (USED) OPERATING ACTIVITIES				A.	289000
CASH FLOW FROM INVESTING ACTIVITIES
	SALE FOR LAND					81000
	PAYMENT FOR EQUIPMENT					-196000
					B.	-115000
CAHS FLOW FROM FINANCING ACTIVITIES
	PAYMENT FOR LONG TERM NOTES					-25000
	CAPITAL					41800
	CASH DIVIDEND					4100
	INTEREST PAID					-95350
	LOSS ON SALE OF INVESTMENT					-8000
	INCOME TAX					-56700
	DIVIDEND PAID					-40000
	DISCOUNT ON BONDS					-4850
					C.	-184000
	A+B+C		NET INCREASE IN CASH			-10000
			CLOSING BALANCE			2000
			CASH AT OPENING BALANCE			12000