Question

Championship Boxing, Inc.

Championship Boxing, Inc. is a small manufacturer of cardboard boxes of all sizes. You have reported for your first day of work, and the company is in an uproar. Yearly financial statements are being prepared, but a computer malfunction of the company’s new BOX-9000 computer has inadvertently erased parts of the company’s balance sheet, along with almost all related data except the company’s statement of cash flows. The IT department is working to retrieve earlier backups, but estimates that the reconstruction of the data will take about 24 hours.

Unfortunately, financial statements are to be presented at a stockholders’ meeting in one hour. The company uses the indirect method to prepare its statement of cash flows (rather than the direct method), so your new supervisor believes the missing data for the balance sheet can be prepared using the statement of cash flows. You are assigned this task, since you were top student in your business school class. Meanwhile, the supervisor will go to the stockholders’ meeting and give some introductory remarks.

In addition to the statement of cash flows, the following data survived the computer mishap:

• The investments were sold for $280,000 cash.
• Equipment was acquired for $152,080 cash.
• Land was acquired for $326,000 cash.
• There were no disposals of equipment during the year.
• 12,500 shares of common stock were sold for cash during the year.
• There was a $96,000 debit to Retained Earnings for cash dividends declared.

Statement of Cash Flows

Your supervisor has provided you with the following statement of cash flows, prepared using the indirect method. Recall that the statement of cash flows consists of three sections: cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities. Review the statement, and then proceed to the next panel.

Championship Boxing, Inc. Statement of Cash Flows For the Year Ended December 31, 20Y8 Cash flows from (used for) operating activities: Net income $186,540 Adjustments to reconcile net income to net cash flow from operating activities: Depreciation 18,400 Gain on sale of investments (50,000) Changes in current operating assets and liabilities: Increase in accounts receivable (25,390) Increase in inventories (33,450) Increase in accounts payable 41,100 Decrease in accrued expenses payable (12,470) Net cash flow from operating activities $124,730 Cash flows from (used for) investing activities: Cash received from sale of investments $280,000 Cash paid for purchase of land (326,000) Cash paid for purchase of equipment (152,080) Net cash flow used for investing activities (198,080) Cash flows from (used for) financing activities: Cash received from sale of common stock $187,500 Cash paid for dividends (91,200) Net cash flow from financing activities 96,300 Net increase in cash $22,950 Cash balance, January 1, 20Y8 585,920 $608,870 Cash balance, December 31, 20Y8

Answer 1

Championship Boxing, Inc.
Comparative Balance Sheet
December 31,20Y8 and 20Y7
	20Y8	20Y7
Assets
Cash	$608,870	$585,920
Accounts receivable (net)	$230,950	$205,560
Inventories	$651,870	$618,420
Investments	$0	$230,000
Land	$326,000	$0
Equipment	$705,200	$553,120
Accumulated depreciation-equipment	($166,400)	($148,000)
Total assets	$2,356,490	$2,045,020
Liabilities
Accounts payable (merchandise creditors)	$432,930	$391,830
Accrued expenses payable (operating expenses)	$41,160	$53,630
Dividends payable	$24,000	$19,200
Total liabilities	$498,090	$464,660
Stockholders' equity
Common stock, $4 par	$150,000	$100,000
Paid-in capital in excess of par	$417,500	$280,000
Retained earnings	$1,290,900	$1,200,360
Total stockholders' equity	$1,858,400	$1,580,360
Total liabilities and stockholders' equity	$2,356,490	$2,045,020

Calculations:

i. Cost of investments:

Investments
Cash received from sale of investment	$280,000
Gain on sale of investments	($50,000)
Cost of investments	$230,000

ii. Segregation of cash received from sale of common stock into common stock & Paid-in capital in excess of par:

Common stock (12,500 x $4)	$50,000
Paid-in capital in excess of par	$137,500
Total cash received from sale of common stock	$187,500

iii. Retained earnings Dec.31,20Y7:

Retained earnings Dec.31,20Y8	$1,290,900
(Less): Net income	($186,540)
Add: Dividends	$96,000
Retained earnings Dec.31,20Y7	$1,200,360