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:
Depreciation	18,400
Gain on sale of investments	(50,000)
Changes in current operating assets and liabilities:
Increase in accounts receivable	(25,390)
Increase in inventories	(33,550)
Increase in accounts payable	41,100
Decrease in accrued expenses payable	(12,470)
Net cash flow from operating activities			$124,630
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			$22,930
Cash balance, January 1, 20Y8			585,920
Cash balance, December 31, 20Y8			$608,850

Balance Sheet

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

Championship Boxing, Inc. Comparative Balance Sheet December 31, 20Y8 and 20Y7
	20Y8			20Y7
Assets
Cash		608,850			$585,920
Accounts receivable (net)		230,950
Inventories		615,870			618,320
Investments		0			230,000
Land		326,000			0
Equipment		705,200			553,200
Accumulated depreciation-equipment		(166,400)			148,000
Total assets		2,356,470
Liabilities
Accounts payable (merchandise creditors)		432,930			$391,830
Accrued expenses payable (operating expenses)		41,150
Dividends payable		24,000			19,200
Total liabilities		$498,080
Stockholders' Equity
Common stock, $4 par		150,000			$100,000
Paid-in capital in excess of par		417,500			280,000
Retained earnings		1,290,890			1,200,350
Total stockholders' equity		$1,858,390			1,580,350
Total liabilities and stockholders' equity		2,356,470