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Problem 16-3A (Concluded) Part 2 Forten Company's operations provide a positive net cash inflow of $40,900 a good result. At the same time, the cash balance decreased by $23,700 (32%) during the year. Two major cash outflows are the retirement of debt ($46,125) and the dividend payment ($50,100), which together represent 87% of the $114,975 in net income. Also, the $30,000 cash investment in equipment is presumably necessary to replace the older equipment sold. Helping fund these cash outflows is $50,000 cash from issuance of stock. Moreover, the company took on additional debt (more than 30% increase in indebtedness); namely, $66,375 in long-term notes. The company must remember that that the debt must eventually be repaid with interest. In summary, perhaps the company should review the wisdom of paying cash dividends that are considerably larger than cash provided from operations, especially when the payment also results in a deteriorating cash position and when the company is taking on additional debt.

Problem 16-3A Forten Company's current-year income statement, comparative balance sheets, and additional information Indirect: Statement of follow. For the year, (1) all sales are credit sales, (2) all credits to Accounts Receivable reflect cash receipts cash flows from customers, (3) all purchases of inventory are on credit, and (4) all debits to Accounts Payable reflect cash A1 P2 P3 payments for inventory. Additional Information on Current-Year Transactions a. The loss on the cash sale of equipment was $5,125 (details in b). b. Sold equipment costing $46,875, with accumulated depreciation of $30,125, for $11,625 cash. c. Purchased equipment costing $96,375 by paying $30,000 cash and signing a long-term notes payable for the balance. d. Paid $46,125 cash to reduce the long-term notes payable. e. Issued 2,500 shares of common stock for $20 cash per share. f. Declared and paid cash dividends of $50,100. Required Check Cash from operating 1. Prepare a complete statement of cash flows using the indirect method for the current year. Disclose activities, $40,900 any noncash investing and financing activities in a note. Analysis Component 2. Analyze and discuss the statement of cash flows prepared in part 1, giving special attention to the wisdom of the cash dividend payment. Problem 16-3A (50 minutes) - Part 1 FORTEN COMPANY Statement of Cash Flows For Current Year Ended December 31 Cash flows from operating activities Net income $114,975 Adjustments to reconcile net income to net cash provided by operating activities: Income statement items not affecting cash Depreciation expense. Loss on disposal of equipment 20,750 5,125 Changes in current assets and current liabilities Increase in accounts receivable ($65,810$50,625)..(15,185) Increase in inventory ($275,656$251,800)..(23,856) Decrease in prepaid expenses ($1,875$1,250)..625 Cash flows from investing activities Cash received from sale of equipment 11,625 Cash paid for equipment. (30,000) Net cash used in investing activities. (18,375) Cash flows from financing activities Cash paid on long-term notes. (46,125) Cash received from issuing stock (2,500$20)..50,000 Cash paid for dividends (50,100) Net cash used in financing activities Net decrease in cash.. $(23,700)(46,225) Cash balance at December 31, prior year Cash balance at December 31, current year. Noncash investing and financing activities Purchased equipment for $96,375 by signing a $66,375 long-term notes payable and paying $30,000 in cash