Problem

Prepare and Analyze a Statement of Cash Flows with a WorksheetSatellite World was founded...

Prepare and Analyze a Statement of Cash Flows with a Worksheet

Satellite World was founded in 2014 to apply a new technology for efficiently transmitting closedcircuit (cable) television signals without the need for an in-ground cable. The company earned a profit of $115,000 in 2014, its first year of operations, even though it was serving only a small test market. In 2015, the company began dramatically expanding its customer base. Management expects both sales and net income to more than triple in each of the next five years.

Comparative balance sheets at the end of 2014 and 2015, the company’s first two years of operations, follow. (Notice that the balances at the end of the current year appear in the right-hand column.)

Additional Information

The following information regarding the company’s operations in 2015 is available in either the company’s income statement or its accounting records:

1. Net income for the year was $440,000. The company has never paid a dividend.
2. Depreciation for the year amounted to $147,000.
3. During the year the company purchased plant assets costing $2,200,000, for which it paid $1,850,000 in cash and financed $350,000 by issuing a long-term note payable. (Much of the cash used in these purchases was provided by short-term borrowing, as described below.)
4. In 2015, Satellite World borrowed $1,450,000 against a $5.5 million line of credit with a local bank. In its balance sheet, the resulting obligations are reported as notes payable (short-term).
5. Additional shares of capital stock (no par value) were issued to investors for $500,000 cash.

December 31,

SATELLITE WORLD
COMPARATIVE BALANCE SHEETS
	December 31,
	2014	2015
Assets
Cash and cash equivalents	$ 80,000	$ 37,000
Accounts receivable	100,000	850,000
Plant and equipment (net of accumulated depreciation)	600,000	2,653,000
Totals	$780,000	$3,540,000
Liabilities&Stockholders’ Equity
Notes payable (short-term)	$ –0–	$1,450,000
Accounts payable	30,000 63,000
Accrued expenses payable	45,000	32,000
Notes payable (long-term)	390,000	740,000
Capital stock (no par value)	200,000	700,000
Retained earnings	115,000 555,000
Totals	$780,000	$3,540,000

Instructions

a. Prepare a worksheet for a statement of cash flows, following the general format illustrated in Exhibit 13–7 . ( Note:If this problem is completed as a group assignment, each member of the group should be prepared to explain in class all entries in the worksheet, as well as the group’s conclusions in parts c and d. )
b. Prepare a formal statement of cash flows for 2015, including a supplementary schedule of noncash investing and financing activities. (Follow the format illustrated in Exhibit 13–8 . Cash provided by operating activities is to be presented by the indirect method. )
c. Briefly explain how operating activities can be a net use of cash when the company is operating so profitably.
d. Because of the expected rapid growth, management forecasts that operating activities will be an even greater use of cash in the year 2016 than in 2015. If this forecast is correct, does Satellite World appear to be heading toward illiquidity? Explain.

EXHIBIT 13–7

Worksheet for a Statement of Cash Flows

AUTO SUPPLY CO.
WORKSHEET FOR A STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2015
	Effects of Transactions
Balance sheet effects:	Beginning Balance	Debit Changes	Credit Changes	Ending Balance
Assets
Cash and Cash Equivalents	50,000		(x) 5,000	45,000
Marketable Securities	40,000		(8) 15,000	25,000
Accounts Receivable	320,000	(4) 10,000	330,000
Inventory	240,000		(5) 5,000	235,000
Plant and Equipment (net of accumulated depreciation)	600,000	(9) 100,000	(3) 60,000	640,000
Totals	1,250,000			1,275,000
Liabilities&Stockholders’ Equity
Accounts Payable	150,000		(6) 10,000	160,000
Accrued Expenses Payable	60,000	(7) 15,000		45,000
Mortgage Note Payable	–0–		(9) 70,000	70,000
Bonds Payable	500,000	(10) 150,000		350,000
Capital Stock	160,000			160,000
Retained Earnings	380,000	(2) 140,000	(1) 250,000	490,000
Totals	1,250,000	415,000	415,000	1,275,000
Cash effects:		Sources	Uses
Operating activities:
Net income		(1) 250,000
Depreciation expense		(3) 60,000
Increase in accounts receivable			(4) 10,000
Decrease in inventory		(5) 5,000
Increase in accounts payable		(6) 10,000
Decrease in accrued expenses payable			(7) 15,000
Gain on sales of marketable securities			(8) 20,000
Investing activities:
Proceeds from sales of marketable securities		(8) 35,000
Cash paid to acquire plant assets			(9) 30,000
Financing activities:
Dividends paid			(2) 140,000
Payments to retire bonds payable			(10) 150,000
Subtotals		360,000	365,000
Net decrease in cash		(x) 5,000
Totals		365,000	365,000

EXHIBIT 13–8

Auto Supply Co. Statement of Cash Flows

AUTO SUPPLY CO.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2015
Cash flows from operating activities:
Net income		$ 250,000
Add: Depreciation expense		60,000
Decrease in inventory		5,000
Increase in accounts payable		10,000
Subtotal		$ 325,000
Less: Increase in accounts receivable	$ 10,000
Decrease in accrued expenses payable	15,000
Gain on sales of marketable securities	20,000	45,000
Net cash provided by operating activities		$ 280,000
Cash flows from investing activities:
Proceeds from sales of marketable securities	$ 35,000
Cash paid to acquire plant assets (see supplementary schedule below)	(30,000)
Net cash provided by investing activities		5,000
Cash flows from financing activities:
Dividends paid	$ (140,000)
Payments to retire bonds payable	(150,000)
Net cash used for financing activities		(290,000)
Net decrease in cash		$ (5,000)
Cash and cash equivalents, Jan. 1, 2015		50,000
Cash and cash equivalents, Dec. 31, 2015		$ 45,000
Supplementary Schedule: Noncash Investing and Financing Activities
Purchases of plant assets		$ 100,000
Less: Portion financed through issuance of long-term debt		70,000
Cash paid to acquire plant assets		$ 30,000