Presented below are the balance sheets of Trout Corporation as of December 31, Year 1 and Year 2, and the income statement for the year ended December 31, Year 2. The statement of retained earnings for the year ended December 31, Year 2 is on the next page. All dollars are in thousands.

Trout Corporation

Balance Sheets

December 31, Year 1 and Year 2

Assets Year 1 Year 2

Cash $204 $403

Treasury Bills & Commercial Paper 143 106

Accounts Receivable, net 495 695

Inventories 780 895

Land 250 350

Plant and Equipment 900 1,398

Accumulated Depreciation (170) (295)

Total Assets $2,602 $3,552

Liabilities & Stockholders Equity

Accounts Payable $700 $650

Dividends Payable -- 10

Accrued Liabilities 168 413

Notes Payable, Long-Term -- 450

Bonds Payable 500 500

Bond Discount (18) (16)

Common Stock, Par Value $20 600 640

Additional Paid-In Capital 244 304

Retained Earnings 408 601

Total Liabilities & Stockholders Equity $2,602 $3,552

Trout Corporation

Income Statement

For the Year Ended December 31, Year 2

Net Sales Revenue $2,000

Operating Expenses:

Cost of Goods $1,126

Selling & Administrative Expenses 456 1,582

Operating Income $418

Other Income (Expense):

Interest Expense $(80)

Gain on Sale of Equipment 5 (75)

Pre-Tax Income from Continuing Operations $343

Less: Income Tax Expense: 90

Net Income $253

Trout Corporation

Statement of Retained Earnings

For the Year Ended December 31, Year 2

Retained Earnings as of January 1, Year 2 $408

Prior Period Adjustment (20)

Adjusted prior period 388

Add: Net Income $ 253

Deduct: Dividend Declared, October 10, Year 2 (40) 213

Retained Earnings, December 31, Year 2 $601

Additional Information:

1. On April 15, Year 2, Trout issued 2 shares of its common stock for land having a fair value

of $100.

2. On May 25, Year 2, Trout borrowed money from an insurance company. The underlying

promissory note bears interest at 15% and is payable in three equal annual installments of

$150. The first payment is due on May 25, Year 3.

3. On July 1, Year 2, Trout sold equipment costing $52 for $33 cash.

4. On October 10, Year 2, Trout declared a cash dividend of $40 on its common stock.

5. The Selling and Administrative Expense account includes Depreciation Expense.

6. On September 1, Year 2, Trout paid a $20 additional tax assessment for Year 1 due to an
error in tax calculation discovered by the Internal Revenue Service. This payment was
appropriately recorded by Trout as a prior period adjustment.

Required:

Create an EXCEL worksheet with one tab for the Direct Method and one tab for the Indirect Method.

A. Using EXCEL, prepare a statement of cash flows for Trout Corporation using the direct method of reporting cash flows from operating activities for the year ended December 31, Year 2.

B. Using the same EXCEL workbook and a second tab, prepare the operating activities section only for the statement of cash flows for Trout Corporation using the indirect method for the year ended December 31, Year 2.

C. Using Microsoft Word answer the following -

1. Using the Accounts Receivable account, explain how a company may report net

income on its income statement using the accrual basis but report negative cash flow

from operating activities on its statement of cash flows using the cash basis. [Hint:

Assume that you calculate an excess of revenues over expenses (i.e., net income on

the accrual basis) but your calculation of cash flow from operating activities

(i.e., the cash basis) produces a negative number. That is, cash is used rather than

provided. See chapters 1, 4 and 21.]

2. What steps do you recommend be taken to ensure that net cash flow from operating

activities is positive next year? [Hint: Analyze the Accounts Receivable account.]