23-7 (SCFDirect and Indirect Methods from Comparative Financial Statements) Chapman Company, a major retailer of bicycles and accessories, operates several stores and is a publicly traded company. The comparative statement of financial position and income statement for Chapman as of May 31, 2010, are shown on the next page. The company is preparing its statement of cash flows CHAPMAN COMPANY COMPARATIVE STATEMENT OF FINANCIAL POSITION AS OF MAY 31 2010 2009 Current assets Cash $ 28,250 $ 20,000 Accounts receivable 75,000 58,000 Merchandise inventory 220,000 250,000 Prepaid expenses 9,000 7,000 Total current assets 332,250 335,000 Plant assets Plant assets 600,000 502,000 Less: Accumulated depreciation 150,000 125,000 Net plant assets 450,000 377,000 Total assets $782,250 $712,000 Current liabilities Accounts payable $123,000 $115,000 Salaries payable 47,250 72,000 Interest payable 27,000 25,000 Total current liabilities 197,250 212,000 Long-term debt Bonds payable 70,000 100,000 Total liabilities 267,250 312,000 Shareholders equity Common stock, $10 par 370,000 280,000 Retained earnings 145,000 120,000 Total shareholders equity 515,000 400,000 Total liabilities and shareholders equity $782,250 $712,000 CHAPMAN COMPANY INCOME STATEMENT FOR THE YEAR ENDED MAY 31, 2010 Sales $1,255,250 Cost of merchandise sold 722,000 Gross profit 533,250 Expenses Salary expense 252,100 Interest expense 75,000 Other expenses 8,150 Depreciation expense 25,000 Total expenses 360,250 Operating income 173,000 Income tax expense 43,000 Net income $ 130,000 The following is additional information concerning Chapmans transactions during the year ended May 31, 2010. 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. There were no penalties assessed for the retirement of bonds. 8. 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, 2010, using