Prepare and Analyze a Statement of Cash Flows; Involves Preparation of a Worksheet
Miracle Tool, Inc., sells a single product (a combination screwdriver, pliers, hammer, and crescent wrench) exclusively through television advertising. The comparative income statements and balance sheets are for the past two years.
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 $14,000 cash, resulting in a $1,000 nonoperating loss.
3. The company purchased plant assets for $20,000, paying $2,000 in cash and issuing a note payable for the $18,000 balance.
4. During the year the company repaid a $10,000 note payable, but incurred an additional $18,000 in long-term debt as described in 3.
5. The owners invested $15,000 cash in the business as a condition of the new loans described in paragraph 4.
4. During the year the company repaid a $10,000 note payable, but incurred an additional $18,000 in long-term debt as described in 3.
5. The owners invested $15,000 cash in the business as a condition of the new loans described in paragraph 4.
MIRACLE TOOL, INC. | ||
COMPARATIVE INCOME STATEMENT | ||
FOR THE YEARS ENDED DECEMBER 31, 2014 AND 2015 | ||
| 2014 | 2015 |
Sales | $500,000 | $ 350,000 |
Less: Cost of goods sold | 200,000 | 140,000 |
Gross profit on sales | $300,000 | $ 210,000 |
Less: Operating expenses (including depreciation of $34,000 in 2014 and $35,000 in 2015) | 260,000 | 243,000 |
Loss on sale of marketable securities | –0– | 1,000 |
Net income (loss) | $ 40,000 | ($ 34,000) |
MIRACLE TOOL, INC. | ||
COMPARATIVE BALANCE SHEETS | ||
| December 31, | |
| 2014 | 2015 |
Assets |
|
|
Cash and cash equivalents | $ 10,000 | $ 60,000 |
Marketable securities | 20,000 | 5,000 |
Accounts receivable | 40,000 | 23,000 |
Inventory | 120,000 | 122,000 |
Plant and equipment (net of accumulated depreciation) | 300,000 | 285,000 |
Totals | $490,000 | $495,000 |
Liabilities&Stockholders’ Equity |
|
|
Accounts payable | $ 50,000 | $ 73,000 |
Accrued expenses payable | 17,000 | 14,000 |
Note payable | 245,000 | 253,000 |
Capital stock (no par value) | 120,000 | 135,000 |
Retained earnings | 58,000 | 20,000 |
Totals | $490,000 | $495,000 |
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, d, and e. )
b. Prepare a formal statement of cash flows for 2015, 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. Expl in how Miracle Tool, Inc., achieved positive cash flows from operating activities, despite incurring a net loss for the year.
d. Does the company’s financial position appear to be improving or deteriorating? Explain.
e. Does Miracle Tool, Inc., appear to be a company whose operations are growing or contracting? Explain.
f. Assume that management agrees with your conclusions in parts c, d, and e. What decisions should be made and what actions (if any) should be taken? 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 |
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