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Problem 1. (30 Points). Use the following financial statements and additional information to (1) prepare a statement of cash flows for the year ended December

Problem 1. (30 Points).

Use the following financial statements and additional information to (1) prepare a statement of cash flows for the year ended December 31, Year 2 using the indirect method, and (2) compute the company's cash flow on total assets ratio for Year 2.

Derby Company

Balance Sheets

At December 31

Year 2

Year 1

Assets:

Cash

$ 85,600

$ 65,200

Accounts receivable, net

72,850

56,750

Merchandise inventory

157,750

144,850

Prepaid expenses

6,080

12,680

Equipment

280,600

245,600

Accumulated depreciation-Equipment

(80,600)

(97,600)

Total assets

$522,280

$427,480

Liabilities:

Accounts payable

$ 52,850

$ 45,450

Income taxes payable

15,240

12,240

Notes payable (long term)

59,200

79,200

Total liabilities

$127,290

$136,890

Equity:

Common stock

200,000

150,000

Paid-in capital in excess of par

53,000

40,000

Retained earnings

141,990

100,590

Total equity

$394,990

$290,590

Total liabilities and equity

$522,280

$427,480

Derby Company

Income Statement

For Year Ended December 31, Year 2

Sales

$488,000

Cost of goods sold

$212,540

Depreciation expense

43,000

Other operating expenses

106,260

Interest expense

6,400

(368,200)

Other gains (losses):

Gain on sale of equipment

4,700

Income before taxes

124,500

Income taxes expense

41,100

Net income

$ 83,400

Additional Information

a. A $20,000 note payable is retired at its carrying value in exchange for cash.

b. The only changes affecting retained earnings are net income and cash dividends paid.

c. New equipment is acquired for $120,000 cash.

d. Received cash for the sale of equipment that had cost $85,000, yielding a gain of $4,700.

e. Prepaid expenses relate to Other Expenses on the income statement.

f. All purchases and sales of merchandise inventory are on credit.

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