1. The following financial statement data is available for the Winston Salem Company for Dec. 31, 2016. (30 pts)

Comparative Balance Sheet Data

2016 2015

Cash$ 39,835$ 4,000

Accounts Receivable 17,500 12,950

Dividends Receivable 1,000 0

Inventory 42,000 35,000

Prepaid rent 3,000 12,000

Prepaid insurance 2,100 900

Office supplies 1,000 750

Long-term investments 20,000 30,000

Land 125,000 175,000

Building 350,000 350,000

Accumulated depreciation, Building (105,000) (87,500)

Equipment 525,000 400,000

Accumulated depreciation, Equipment (130,000) (112,000)

Patent 45,000 50,000

Total assets$ 936,435$ 871,100

Accounts payable$ 26,000$ 30,000

Income taxes payable 5,000 4,000

Wages payable 5,000 3,000

Short-term notes payable 10,000 10,000

Dividends payable 1,500 0

Unearned Income 500 2,000

Product Warranty Payable 5,303 10,853

Long-term notes payable 60,000 70,000

Bonds payable 415,000 415,000

Common stock ($10 par) 290,000 220,000

Paid-in capital in excess of par 46,410 17,500

Retained earnings 106,722 88,747

Treasury Stock (35,000) --

Total liabilities and equity$ 936,435$ 871,100

Income Statement

Sales revenue$1,160,000

Cost of goods sold( 748,000)

Gross margin 412,000

Operating expenses( 276,400)

Income from operations 135,600

Other revenues/expense

Gain on sale of land 8,000

Gain on sale of long-term investment 4,000

Dividend revenue 2,400

Interest expense(51,750)( 37,350)

Income before taxes 98,250

Income tax expense( 39,400)

Net income 58,850

Instructions:

Prepare a statement of cash flows in proper form for 2016 using the Indirect method. Then, redo the Operating Section only using the Direct method.

In this exercise, follow these steps:

o Create a Comparative Balance Sheet where you compute the dollar change in every account on the Balance Sheet.

o Label each item on the Balance Sheet as being Operating, Investing, or Financing. This is extremely important because then you know where each item belongs on the Cash Flow Statement. Dont bother labeling Cash or Retained Earnings because these are affected by all three activities.

o For the Operating Section (Indirect Method):

Start with Net Income

Add back Depreciation and/or Amortization Expense

Adjust out anything included in Net Income that belongs in the Investing or Financing section

Add or subtract accordingly all items you labeled as an Operating activity from the Balance Sheet

o For the Investing and Financing Sections:

Use T-Accounts for each account to help you solve for the correct amounts: start with beginning balance on the correct side; include what you know including ending balance; figure out what else needed to happen in order to get the ending balance.

Use journal entries (if appropriate) to help you visualize a transaction and its affect (or not) on cash

Be sure to account for all changes in the balance sheet and to reconcile those to the appropriate section of the cash flow statement.

o For the Operating Section (Direct Method)

You are starting with Sales, adjusting it for cash received from customers, then going directly down the Income Statement and doing the same with each item on the Income Statement (see Chapter 14 Appendix).

You will end up with the same answer for Operating Cash Flow.

Be sure to consider all items labeled Operating in your Comparative Balance Sheet.

Other Important Information

There are no non-cash transactions affecting investing activities.

The only sales of assets are the ones reflected in the income statement.

On April 1, 2016, the company paid $14 per share for Treasury Shares. To remember how this affected financial position, review this in Chapter 11.

On Sept. 1, 2016, the company declared and issued a 5% stock dividend on outstanding shares when the market price of the stock was $17. To remember how this affected financial position, review this in Chapter 11.

All other transactions affecting Contributed Capital and Retained Earnings occurred after Sept. 1, 2016.

There were no prior period adjustments.