Problem

Prepare and Analyze a Statement of Cash Flows; Involves Preparation of a WorksheetPurcells...

Prepare and Analyze a Statement of Cash Flows; Involves Preparation of a Worksheet

Purcells, Inc., sells a single product (Pulsa) exclusively through newspaper advertising. The comparative income statements and balance sheets are for the past two years.

PURCELLS, INC.
COMPARATIVE INCOME STATEMENT
FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2015
	2014	2015
Sales	$640,000	$ 410,000
Less: Cost of goods sold	310,000	190,000
Gross profit on sales	330,000	220,000
Less: Operating expenses (including depreciation of $28,000 in 2014 and $29,000 in 2015)	260,000	250,000
Loss on sale of marketable securities	0	4,000
Net income (loss)	$ 70,000	$ (34,000)

PURCELLS, INC.
COMPARATIVE BALANCE SHEETS
	December 31,
Assets	2014	2015
Cash and cash equivalents	$ 22,000	$ 60,000
Marketable securities	27,000	12,000
Accounts receivable	40,000	35,000
Inventory	120,000	128,000
Plant and equipment (net of accumulated depreciation)	250,000	241,000
Totals	$459,000	$476,000
Liabilities&Stockholders’ Equity
Accounts payable	50,000	70,000
Accrued expenses payable	16,000	14,000
Notes payable	235,000	237,000
Capital stock (no par value)	108,000	143,000
Retained earnings	50,000	12,000
Totals	$459,000	$476,000

Additional Information

The following information regarding the company’s operations in 2015 is available from the company’s accounting records:

1. Early in the year the company declared and paid a $4,000 cash dividend.
2. During the year marketable securities costing $15,000 were sold for $11,000 cash, resulting in a $4,000 nonoperating loss.
3. The company purchased plant assets for $20,000, paying $8,000 in cash and issuing a note payable for the $12,000 balance.
4. During the year the company repaid a $10,000 note payable, but incurred an additional $12,000 in long-term debt as described in 3, above.
5. The owners invested $35,000 cash in the business as a condition of the new loans described in paragraphs 3 and 4, above.

Instructions

a. Prepare a worksheet for a statement of cash flows, following the example shown in Exhibit 13–7.
b. Prepare a formal statement of cash flows for 2011, including a supplementary schedule of noncash investing and financing activities. (Use the format illustrated in Exhibit 13–8. Cash provided by operating activities is to be presented by the indirect method. )
c. Explain how Purcells, Inc., achieved positive cash flows from operating activities, despite incurring a net loss for the year.

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