Mastery Problem: Statement of Cash Flows

Championship Boxing, Inc.

Championship Boxing, Inc. is a small manufacturer of cardboard boxes of all sizes. You have reported for your first day of work, and the company is in an uproar. Yearly financial statements are being prepared, but a computer malfunction of the companys new BOX-9000 computer has inadvertently erased parts of the companys balance sheet, along with almost all related data except the companys statement of cash flows. The IT department is working to retrieve earlier backups, but estimates that the reconstruction of the data will take about 24 hours.

Unfortunately, financial statements are to be presented at a stockholders meeting in one hour. The company uses the indirect method to prepare its statement of cash flows (rather than the direct method), so your new supervisor believes the missing data for the balance sheet can be prepared using the statement of cash flows. You are assigned this task, since you were top student in your business school class. Meanwhile, the supervisor will go to the stockholders meeting and give some introductory remarks.

In addition to the statement of cash flows, the following data survived the computer mishap:

The investments were sold for $280,000 cash.

Equipment was acquired for $152,000 cash.

Land was acquired for $326,000 cash.

There were no disposals of equipment during the year.

12,500 shares of common stock were sold for cash during the year.

There was a $96,000 debit to Retained Earnings for cash dividends declared.

Statement of Cash Flows

Your supervisor has provided you with the following statement of cash flows, prepared using the indirect method. Recall that the statement of cash flows consists of three sections: cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities. Review the statement, and then proceed to the next panel.

Championship Boxing, Inc. Statement of Cash Flows For the Year Ended December 31, 20Y8

Cash flows from (used for) operating activities:

Net income$186,540

Adjustments to reconcile net income to net cash flow from operating activities:

Depreciation18,400

Gain on sale of investments(50,000)

Changes in current operating assets and liabilities:

Increase in accounts receivable(25,390)

Increase in inventories(33,450)

Increase in accounts payable41,100

Decrease in accrued expenses payable(12,470)

Net cash flow from operating activities $124,730

Cash flows from (used for) investing activities:

Cash received from sale of investments$280,000

Cash paid for purchase of land(326,000)

Cash paid for purchase of equipment(152,000)

Net cash flow used for investing activities (198,000)

Cash flows from (used for) financing activities:

Cash received from sale of common stock$187,500

Cash paid for dividends(91,200)

Net cash flow from financing activities 96,300

Net increase in cash $23,030

Cash balance, January 1, 20Y8 585,920

Cash balance, December 31, 20Y8 $608,950

Balance Sheet

Using the information on above, complete the following comparative balance sheet.

Championship Boxing, Inc. Comparative Balance Sheet December 31, 20Y8 and 20Y7

20Y820Y7

Assets

Cash $ $585,920

Accounts receivable (net) 230,970

Inventories 618,320

Investments 0

Land 0

Equipment 705,120

Accumulated depreciation-equipment (166,400)

Total assets $ $

Liabilities

Accounts payable (merchandise creditors) $ $391,830

Accrued expenses payable (operating expenses) 41,160

Dividends payable 19,200

Total liabilities $498,090 $

Stockholders' Equity

Common stock, $4 par $ $100,000

Paid-in capital in excess of par 280,000

Retained earnings

Total stockholders' equity $1,858,320 $

Total liabilities and stockholders' equity $ $

Feedback

Review the relationships between the beginning and ending balance sheet amounts, and their effect on the statement of cash flows.