Question

Please be accurate with the answers & kindly, show me the step by step solution.

Palindrome Corp has prepared the following comparative balance sheet statements for 2015 and 2016: Cash Accounts Receivable Inventory Prepaid Expenses Plant Assets Accumulated Depreciation Patent 2016 569,000 427,000 272,000 55,000 2,830,000 (960,000) 103,000 3,296,000 2015 245,000 316,000 297,000 64,000 2,508,000 (852,000) 122,000 2,700,000 Accounts Payable Accrued Liabilities Loan Payable Preferred Stock Additional Paid-in Capital - Preferred Common Stock Retained Earnings 248,000 102,000 100,000 358,000 112,000 1,164,000 1,212,000 3,296,000 267,000 78,000 500,000 58,000 12,000 1,164,000 621,000 2,700,000 The Accumulated Depreciation account has been credited only for the depreciation expense for the period. The Retained Earnings account has been charged for dividends of $210,000 and credited for the net income for the year. The income statement for 2016 is as follows: Sales Revenue Cost of Sales Gross Profit Operating Expenses Net Income 2,451,000 934,000 1,517,000 716,000 801,000 a) From the information above, prepare a statement of cash flows (indirect method for Palindrome for year ended December 31, 2016. b) From the information above, prepare a schedule of cash flows provided by operating activities using the direct method

Answer 1

Answer (a)

Statement of cash flows using indirect method:

Palindrome Corp.
Statement of Cash Flows
For the year ended 31 December 2016
	$
Cash Flows from operating activities:
Net income		801,000
Adjustments to reconcile net income to Cash Flows from operating activities:
Depreciation charged ($ 960,000 - $ 852,000)		108,000
		909,000
Changes in current Operating assets and liabilities
Increase in Account Receivable		-111,000
Decrease in Inventory		25,000
Decrease in prepaid expenses		9,000
Decrease in Accounts payable		-19,000
Increase in accrued liabilities		24,000
Cash flow from operating activities		837,000
Cash Flow from (used for) investing activities
Plant assets purchased ($ 2,830,000 - $ 2,508,000)		-322,000
Patent sold ($ 122,000 - $ 103,000 )		19,000
Cash Flow used for investing activities		-303,000
Cash Flow from (used for) financing activities
Loan repaid ($ 500,000 - $ 100,000)		-400,000
Preferred stock issued		400,000
Dividends paid		-210,000
Cash Flow from financing activities		-210,000
Net cash ouflow from all activities		324,000
Cash at the beginning of the year		245,000
Cash at the end of the year		569,000

Answer (b)

Schedule of cash flows provided by operating activities using the direct method:

Particulars	Amount ($)
Cash Inflows:
Cash receipt from customers (1)	$ 2,340,000
Cash Outflows:
Cash Payments to Suppliers (2)	$ 928,000
Cash payments for Operating expenses (3)	$ 575,000
Total cash outflows	$ 1,503,000
Cash flows provided by operating activities	$ 837,000

Working Note:

1. Cash receipt from customers = Sales + Beginning Accounts Receivable – Closing Accounts Receivable

= $ 2,451,000 + $ 316,000 - $ 427,000 = $ 2,340,000

2. Cash Payments to Suppliers = Cost of sales + Ending inventory - Beginning Inventory + Beginning Accounts Payable – Closing Accounts Payable

= $ 934,000 + $ 272,000 - $ 297,000 + $ 267,000 - $ 248,000 = $ 928,000

3. Cash Payments for Operating expenses = Operating expenses incurred + Ending prepaid expenses - Beginning prepaid expenses + Beginning accrued expenses - Ending accrued expenses - Depreciation

= $ 716,000 + $ 55,000 - $ 64,000 + 78,000 - $ 102,000 – 108,000

= $ 575,000