Prepare and Interpret a Statement of Cash Flows [LO1, LO2]

A comparative balance sheet for Alcorn Company containing data for the last two years is as follows:

Alcorn Company Comparative Balance Sheet This Last Year Year Assets Current assets:
Cash and cash equivalents . . . . . . . . . $ 71,000 $ 50,000 Accounts receivable . . . . . . . . . . . . . . . 590,000 610,000 Inventory . . . . . . . . . . . . . . . . . . . . . . . 608,000 420,000 Prepaid expenses . . . . . . . . . . . . . . . . 10,000 5,000 Total current assets . . . . . . . . . . . . . . . . . 1,279,000 1,085,000 Property, plant, and equipment . . . . . . . . 2,370,000 1,800,000 Less accumulated depreciation . . . . . . 615,000 560,000 Net property, plant, and equipment . . . . . 1,755,000 1,240,000 Long-term investments . . . . . . . . . . . . . . 80,000 130,000 Loans to subsidiaries . . . . . . . . . . . . . . . . 120,000 70,000 Total assets . . . . . . . . . . . . . . . . . . . . . . . $3,234,000 $2,525,000 Liabilities and Stockholders’ Equity Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . $ 870,000 $ 570,000 Accrued liabilities . . . . . . . . . . . . . . . . . 25,000 42,000 Income taxes payable . . . . . . . . . . . . . 133,000 118,000 Total current liabilities . . . . . . . . . . . . . . . 1,028,000 730,000 Bonds payable . . . . . . . . . . . . . . . . . . . . . 620,000 400,000 Total liabilities . . . . . . . . . . . . . . . . . . . . . 1,648,000 1,130,000 Stockholders’ equity:
Common stock . . . . . . . . . . . . . . . . . . . 1,090,000 1,000,000 Retained earnings . . . . . . . . . . . . . . . . 496,000 395,000 Total stockholders’ equity . . . . . . . . . . . . . 1,586,000 1,395,000 Total liabilities and stockholders’ equity . . . $3,234,000 $2,525,000 The following additional information is available about the company’s activities during this year:

a. The company declared and paid a cash dividend this year.

b. Bonds with a principal balance of $380,000 were repaid during this year.

c. Equipment was sold during this year for $70,000. The equipment had cost $130,000 and had $40,000 in accumulated depreciation on the date of sale.

d. Long-term investments were sold during the year for $110,000. These investments had cost $50,000 when purchased several years ago.

e. The subsidiaries did not repay any outstanding loans during the year.

f. Alcorn did not repurchase any of its own stock during the year.
The company reported net income this year as follows:

Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,000,000 Cost of goods sold . . . . . . . . . . . . . . . . . . 1,860,000 Gross margin . . . . . . . . . . . . . . . . . . . . . . . 1,140,000 Selling and administrative expenses . . . . . 930,000 Net operating income . . . . . . . . . . . . . . . . 210,000 Nonoperating items:
Gain on sale of investments . . . . . . . . . $60,000 Loss on sale of equipment . . . . . . . . . . 20,000 40,000 Income before taxes . . . . . . . . . . . . . . . . . 250,000 Income taxes . . . . . . . . . . . . . . . . . . . . . . . 80,000 Net income . . . . . . . . . . . . . . . . . . . . . . . . $ 170,000 Required:
1. Using the indirect method, prepare a statement of cash flows for this year.
2. What problems relating to the company’s activities are revealed by the statement of cash flows that you have prepared?