Question

The Diversified Portfolio Corporation provides investment advice to customers. A condensed income statement for the year ended December 31, 2018, appears below:

Service revenue	$	980,000
Operating expenses		740,000
Income before income taxes		240,000
Income tax expense		96,000
Net income	$	144,000

The following balance sheet information also is available:

	12/31/18			12/31/17
Cash	$	311,000		$	74,000
Accounts receivable		128,000			104,000
Accounts payable (operating expenses)		78,000			64,000
Income taxes payable		14,000			23,000

In addition, the following transactions took place during the year:

1. Common stock was issued for $108,000 in cash.
2. Long-term investments were sold for $54,000 in cash. The original cost of the investments also was $54,000.
3. $84,000 in cash dividends was paid to shareholders.
4. The company has no outstanding debt, other than those payables listed above.
5. Operating expenses include $34,000 in depreciation expense.

Required:
1. Prepare a statement of cash flows for 2018 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 2018 statement of cash flows using the indirect method.

Answer 1

Answer-1)-

DIVERSIFIED PORTFOLIO CORPORATION
STATEMENT OF CASH FLOWS (USING DIRECT METHOD)
FOR THE YEAR ENDED DECEMBER 31,2018
Particulars		Amount
		$
Cash flow from operating activities
Cash received from customers	($980000+$104000-$128000)	956000
Cash payments to Accounts payable	($740000+64000-78000-34000)	-692000
Income taxes paid	($96000+$23000-$14000)	-105000
Net cash flow from operating activities (a)		159000
Cash Flow from Investing activities
Long term investment sold		54000
Net cash Flow from Investing activities (b)		54000
Cash Flow from Financing activities
Cash dividends paid		-84000
Common stock issued		108000
Net cash Flow from Financing activities (c)		24000
Net Change in cash c=a+b+c		237000
Beginning cash balance		74000
Closing cash balance		311000

2)-

DIVERSIFIED PORTFOLIO CORPORATION
STATEMENT OF CASH FLOWS (USING INDIRECT METHOD)
FOR THE YEAR ENDED DECEMBER 31,2018
Particulars		Amount
		$
Cash flow from operating activities
Net Income		144000
Adjustments to reconcile net income to net cash provided by operating activities
Adjustment for non cash effects
Depreciation		34000
Change in operating assets & liabilities
Increase in accounts receivable		-24000
Increase in accounts payable		14000
Decrease in income taxes payable		-9000
Net cash flow from operating activities (a)		159000
Cash Flow from Investing activities
Long term investment sold		54000
Net cash Flow from Investing activities (b)		54000
Cash Flow from Financing activities
Cash dividends paid		-84000
Common stock issued		108000
Net cash Flow from Financing activities (c)		24000
Net Change in cash c=a+b+c		237000
Beginning cash balance		74000
Closing cash balance		311000