Preparing a Statement of Cash Flows: A Comprehensive Problem without a Worksheet
You are the controller for 21st Century Technologies. Your staff has prepared an income statement for the current year and has developed the following additional information by analyzing changes in the company’s balance sheet accounts.
21ST CENTURY TECHNOLOGIES | ||
INCOME STATEMENT | ||
FOR THE YEAR ENDED DECEMBER 31, 2015 | ||
Revenue: |
|
|
Net sales |
| $3,200,000 |
Interest revenue |
| 40,000 |
Gain on sales of marketable securities |
| 34,000 |
Total revenue and gains |
| $3,274,000 |
Costs and expenses: |
|
|
Cost of goods sold | $1,620,000 |
|
Operating expenses (including depreciation of $150,000) | 1,240,000 |
|
Interest expense | 42,000 |
|
Income tax expense | 100,000 |
|
Loss on sales of plant assets | 12,000 |
|
Total costs, expenses, and losses |
| 3,014,000 |
Net income |
| $ 260,000 |
Additional Information
1. Accounts receivable increased by $60,000.
2. Accrued interest receivable decreased by $2,000.
3. Inventory decreased by $60,000, and accounts payable to suppliers of merchandise decreased by $16,000.
4. Short-term prepayments of operating expenses increased by $6,000, and accrued liabilities for operating expenses decreased by $8,000.
5. The liability for accrued interest payable increased by $4,000 during the year.
6. The liability for accrued income taxes payable decreased by $14,000 during the year.
7. The following schedule summarizes the total debit and credit entries during the year in other balance sheet accounts:
Debit Entries
Credit Entries
Marketable Securities
$ 60,000
$ 38,000
Notes Receivable (cash loans made to borrowers)
44,000
28,000
Plant Assets (see paragraph 8 )
500,000
36,000
Notes Payable (short-term borrowing)
92,000
82,000
Capital Stock
20,000
Additional Paid-in Capital—Capital Stock
160,000
Retained Earnings (see paragraph 9 )
120,000
260,000
8. The $36,000 in credit entries to the Plant Assets account is net of any debits to Accumulated Depreciation when plant assets were retired. Thus, the $36,000 in credit entries represents the book value of all plant assets sold or retired during the year.
9. The $120,000 debit to Retained Earnings represents dividends declared and paid during the year. The $260,000 credit entry represents the net income shown in the income statement.
10. All investing and financing activities were cash transactions.
11. Cash and cash equivalents amounted to $244,000 at the beginning of the year and to $164,000 at year-end.
Instructions
a. Prepare a statement of cash flows for the current year. Use the direct method of reporting cash flows from operating activities. Place brackets around dollar amounts representing cash outflows. Show separately your computations of the following amounts:
1. Cash received from customers.
2. Interest received.
3. Cash paid to suppliers and employees.
4. Interest paid.
5. Income taxes paid.
6. Proceeds from sales of marketable securities.
7. Proceeds from sales of plant assets.
8. Proceeds from issuing capital stock.
b. Explain the primary reason why:
1. The amount of cash provided by operating activities was substantially greater than the company’s net income.
2. There was a net decrease in cash over the year, despite the substantial amount of cash provided by operating activities.
c. As 21st Century’s controller, you think that through more efficient cash management, the company could have held the increase in accounts receivable for the year to $10,000, without affecting net income. Explain how holding down the growth in receivables affects cash. Compute the effect that limiting the growth in receivables to $10,000 would have had on the company’s net increase or decrease in cash (and cash equivalents) for the year.
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