Chapman Company, a major retailer of bicycles and accessories, operates several stores and is a publicly traded company. The comparative balance sheet and income statement for Chapman as of May 31, 2020, are as follows. The company is preparing its statement of cash flows.

? ? ? ? ? ? ? ? ? ??? ? ? ? ? ? ? ??Chapman Company? ? ? ? ? ? ? ? ? ??? ? ? ? ? ? ? ? ?Income Statement? ? ? ? ? ? ? ? ? ? For the Year Ended May 31, 2020Sales revenue.......................................................................$1,255,250Cost of goods sold....................................................................722,000Gross profit...............................................................................533,250ExpensesSalaries and wages expense...................................................252,100Interest expense.........................................................................75,000Depreciation expense................................................................25,000Other expenses.............................................................................8,150Total expenses..........................................................................360,250Operating income.....................................................................173,000Income tax expense....................................................................43,000Net income..............................................................................$ 130,000

The following is additional information concerning Chapman?s transactions during the year ended May 31, 2020.

1. All sales during the year were made on account.

2. All merchandise was purchased on account, comprising the total accounts payable account.

3. Plant assets costing $98,000 were purchased by paying $28,000 in cash and issuing 7,000 shares of stock.

4. The ?other expenses? are related to prepaid items.

5. All income taxes incurred during the year were paid during the year.

6. In order to supplement its cash, Chapman issued 2,000 shares of common stock at par value.

7. Cash dividends of $105,000 were declared and paid at the end of the fiscal year.

Instructions

a. Compare and contrast the direct method and the indirect method for reporting cash flows from operating activities.

b. Prepare a statement of cash flows for Chapman Company for the year ended May 31, 2020, using the direct method. Be sure to support the statement with appropriate calculations. (A reconciliation of net income to net cash provided is not required.)

c. Using the indirect method, calculate only the net cash flow from operating activities for Chapman Company for the year ended May 31, 2020.

Transcribed Image Text:

Chapman Company Comparative Balance Sheet As of May 31 2020 2019 Current assets $ 28,250 $ 20,000 Cash 75,000 Accounts receivable 58,000 Inventory Prepaid expenses 220,000 250,000 9,000 7,000 Total current assets 332,250 335,000 Plant assets Plant assets 600,000 502,000 Less: Accumulated depreciation-plant assets 125,000 150,000 Net plant assets 450,000 377,000 Total assets $782,250 $712,000 Current liabilities Accounts payable Salaries and wages payable Interest payable $123,000 $115,000 47,250 72,000 27,000 25,000 Total current liabilities 197,250 212,000 Long-term debt Bonds payable 100,000 70,000 Total liabilities 267,250 312,000 Stockholders' equity Common stock, $10 par Retained earnings 370,000 280,000 145,000 120,000 Total stockholders' equity 515,000 400,000 Total liabilities and stockholders' equity $782,250 $712,000