Question

Forten Company's current year income statement, comparative balance sheets, and additional information follow. For the year, (1) all sales are credit sales, (2) all credits to Accounts Receivable reflect cash receipts from customers, (3) all purchases of inventory are on credit, (4) all debits to Accounts Payable reflect cash payments for inventory, and (5) Other Expenses are paid in advance and are initially debited to Prepaid Expenses.

FORTEN COMPANY Comparative Balance Sheets December 31
	Current Year						Prior Year
Assets
Cash		$	78,400					$	92,500
Accounts receivable			94,460						69,625
Inventory			304,156						270,800
Prepaid expenses			1,400						2,275
Total current assets			478,416						435,200
Equipment			138,500						127,000
Accum. depreciation—Equipment			(46,125	)					(55,500	)
Total assets		$	570,791					$	506,700
Liabilities and Equity
Accounts payable		$	72,141					$	143,175
Short-term notes payable			15,700						9,800
Total current liabilities			87,841						152,975
Long-term notes payable			55,500						67,750
Total liabilities			143,341						220,725
Equity
Common stock, $5 par value			191,250						169,250
Paid-in capital in excess of par, common stock			66,000						0
Retained earnings			170,200						116,725
Total liabilities and equity		$	570,791					$	506,700

  

FORTEN COMPANY Income Statement For Current Year Ended December 31
Sales				$	677,500
Cost of goods sold					304,000
Gross profit					373,500
Operating expenses
Depreciation expense	$	39,750
Other expenses		151,400			191,150
Other gains (losses)
Loss on sale of equipment					(24,125	)
Income before taxes					158,225
Income taxes expense					50,850
Net income				$	107,375

Additional Information on Current Year Transactions

1. The loss on the cash sale of equipment was $24,125 (details in b).
2. Sold equipment costing $103,875, with accumulated depreciation of $49,125, for $30,625 cash.
3. Purchased equipment costing $115,375 by paying $68,000 cash and signing a long-term note payable for the balance.
4. Borrowed $5,900 cash by signing a short-term note payable.
5. Paid $59,625 cash to reduce the long-term notes payable.
6. Issued 4,400 shares of common stock for $20 cash per share.
7. Declared and paid cash dividends of $53,900.

Required:
1. Prepare a complete statement of cash flows using the indirect method for the current year. (Amounts to be deducted should be indicated with a minus sign.)

	FORTEN COMPANY Statement of Cash Flows For Current Year Ended December 31 Cash flows from operating activities Adjustments to reconcile net income to net cash provided by operations: $0 Cash flows from investing activities 0 Cash flows from financing activities: 0 Net increase (decrease) in cash $0 Cash balance at December 31, prior year Cash balance at December 31, current year $0

Answer 1

Solution

FORTEN COMPANY
Cash Flow Statement
For the ended December 31
Cash Flow from Operating Activities:
Net Income	$ 107,375
Adjustments to reconcile net income to net cash provided by operations:
Loss on sale of Equipment	$ 24,125
Depreciation expense	$ 39,750
Increase in Accounts receivables	-$ 24,835
Increase in Inventory	-$ 33,356
Decrease in prepaid expense	$ 875
Decrease in accounts payable	-$ 71,034
A. Cash Flow from Operating Activities		$ 42,900
Cash Flow from Investing Activities:
Sale of Equipment	$ 30,625
Purchase of Equipment	-$ 68,000
B. Cash flow from Investing Activities		-$ 37,375
Cash Flow from Financing Activities:
Issue of Common Stock	$ 88,000
Dividend paid	-$ 53,900
Proceeds from short term notes payable	$ 5,900
Retirement of long term notes payable	-$ 59,625
C. Cash Flow from Financing Activities		-$ 19,625
Increase (Decrease) in cash [A+B+C]		-$ 14,100
Add: cash at the beginning of the year		$ 92,500
Cash at the end of the year		$ 78,400

.

General notes for cash flow
Cash is increased when Current liability increase or Current asset Decrease.
Cash is Decreased when Current liability Decrease or Current asset Increase.
Depreciation or loss on sale of any asset is a non cash expense hence it will be added to net income to get operating cash
Profit on sale of asset or investment is a non cash profit and hence will be deducted from operating income.