Understanding a Statement of Cash Flows [LO1, LO2]

Logan Company is a merchandiser that prepared the statement of cash flows and income statement provided below:

Logan Company Statement of Cash Flows—Indirect Method Operating Activities Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $175 Adjustments to convert net income to cash basis:

Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $108 Decrease in accounts receivable . . . . . . . . . . . . . . . . . 21 Decrease in inventory . . . . . . . . . . . . . . . . . . . . . . . . . 39 Decrease in accounts payable . . . . . . . . . . . . . . . . . . . (50)

Decrease in accrued liabilities . . . . . . . . . . . . . . . . . . (6)

Increase in income taxes payable . . . . . . . . . . . . . . . . 5 Loss on sale of equipment . . . . . . . . . . . . . . . . . . . . . 3 120 Net cash provided by operating activities . . . . . . . . . . . . 295 Investing Activities Additions to property, plant, and equipment . . . . . . . . . . (110)

Proceeds from sale of equipment . . . . . . . . . . . . . . . . . . 9 Net cash used in investing activities . . . . . . . . . . . . . . . . (101)

Financing Activities Retirement of bonds payable . . . . . . . . . . . . . . . . . . . . . (31)

Issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . 4 Cash dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . (35)

Net cash used in fi nancing activities . . . . . . . . . . . . . . . . (62)

Net increase in cash and cash equivalents . . . . . . . . . . . 132 Cash and cash equivalents, beginning balance . . . . . . . 70 Cash and cash equivalents, ending balance . . . . . . . . . . $202 Logan Company Income Statement Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,120 Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,890 Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,230 Selling and administrative expenses . . . . . . . . . . . . . . 835 Net operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . 395 Nonoperating items: Loss on sale of equipment . . . . (3)
Income before taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 392 Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 217 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 175 Required:
Assume that you have been asked to teach a workshop to the employees within Logan Company’s Marketing Department. The purpose of your workshop is to explain how the statement of cash flows differs from the income statement. Your audience is expecting you to explain the logic underlying each number included in the statement of cash flows. Prepare a memo that explains the format of the statement of cash flows and the rationale for each number included in Logan’s statement of cash flows.