Question

The 2017 and 2016 balance sheets of Wallace Corporation follow. The 2017 income statement is also provided. WallaceWallace had no noncash investing and financing transactions during 2017. During the​ year, the company sold equipment for $15,300​, which had originally cost $13,600 and had a book value of $11,400. The company did not issue any notes payable during the year but did issue common stock for $35,000. The company purchased plant assets and​ long-term investments with cash.

Wallace Corporation
Income Statement
For the Year Ended December 31, 2017
Sales revenues			$348,000
Less: Cost of goods sold			73,000
Gross profit			$275,000
Less operating expenses:
Salaries and wages expense		$26,000
Depreciation expense		4,600
Other operating expenses		14,000
	Total operating expenses		44,600
Operating income			$230,400
Plus other income and less other expenses:
Interest expense		9,700
Gain on sale of PP&E		3,900
	Total other income and expenses		5,800
Income before income taxes			224,600
Less: Income tax expense			37,300
Net income			$187,300

Wallace Corporation
Comparative Balance Sheets
December 31, 2017 and 2016
Assets		2017	2016
Current assets:
Cash		$52,000	$23,500
Accounts receivable		31,800	29,700
Inventory		86,000	93,600
Prepaid insurance		3,000	2,400
Total current assets		$172,800	$149,200
Property, plant, and equipment		155,000	136,000
Less: Accumulated depreciation		(30,200)	(27,800)
Investments		115,000	0
Total assets		$412,600	$257,400
Liabilities
Current liabilities:
Accounts payable		$33,000	$36,600
Wages payable		2,600	7,700
Interest payable		2,500	0
Income taxes payable		5,200	0
Other accrued expenses payable		18,600	22,100
Total current liablities		$61,900	$66,400
Long-term liabilities		77,000	116,000
Total liabilities		$138,900	$182,400
Stockholders' equity
Common stock		$107,000	$72,000
Retained earnings		166,700	3,000
Total stockholders' equity		$273,700	$75,000
Total liabilities and equity		$412,600	$257,400

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Requirements

1. Prepare the statement of cash flows for WallaceWallace Corporation for 2017 using the indirect method.

2. Evaluate the​ company's cash flows for the year. Discuss each of the categories of cash flows in your response.

Answer 1

1	Wallace Wallace Corporation
	Cash Flow Statement
	For Current Year Ended December 31 2017
	Cash flow from Operating Activities
	Net Income	$187,300
	Adjustments to reconcile net income to net cash provided by operations
	Depreciation expense	$4,600
	Inventory Decrease	$7,600
	Decrease in Prepaid insurance	-$600
	Account payable decrease	-$3,600
	Decrease in wages payable	-$5,100
	Income taxes payable increase	$5,200
	Account receivable increase	-$2,100
	Decrease in other accrued expense payable	-$3,500
	Interest expense	$9,700
	Gain on sale of PP&E	-$3,900
(A)	Net cash generated from Operating Activities	$195,600
	Cash flow from Investing activities
	Purchase of PP&E(Working Note-1)	-$32,600
	Sale of PP&E(given in question)	$15,300
	Purchase of Investments	-$115,000
(B)	Net cash used in Investing activities	-$132,300
('C)	Cash flow from financing activities
	Interest paid( 9700+opening interest payable-closing interest payable) = 9700-2500	-$7,200
	Payment of long term liabilities(Note payable)	-$39,000
	Issue of Common stock	$35,000
	Dividend paid(Working Note-2)	-$23,600
	Net cash used in financing activities	-$34,800
	Net Increase/(decrease) in Cash (A+B+C)	$28,500
	Cash balance at December 31, 2016	$23,500
	Cash balance at December 31, 2017	$52,000
	Working Note-1
	Calculation of Addition/Deletion in Property, Plant and equipment
	Opening PP&E	$136,000
	Less: PP&E sold during the year	$13,600
		$122,400
	Closing Balance (155,000-122,400)	$155,000
	Hence, Purchase of PP&E	$32,600
	Working Note -2
	Calculation of Dividend paid
	Opening balance in retained earnings	$3,000
	Add: Profit earned during the year	$187,300
	Less: Closing balance of retained earnings	$166,700
	Dividend paid	$23,600
2	Cash flows from Operating	$195,600
	Cash flows from Investing	-$132,300
	Cash flows from Financing	-$34,800
(a)	The overall cash flow of the company is positive $28,500, which is good sign. Further the Operating cash flows of the company is positive which is a good sign for Company.
(b)	Cash flows from Investing activities are Negative, It implies that Company is investing money. Investment helps the company in growth.
(c )	The Financing cash flows are negative mainly due to payment of loan note and dividend.

Please Note that answer of part 2 of the question is subjective matter and it depends upon marks of the question allocated to it. I've highlighted the main points. If you need more explanation please let me know in the comment section.

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