Question
Statement of Cash FlowsIndirect Method Peoria Corp. just completed another successful year, as indicated by the following income statement: For the Year Ended December 31,
Statement of Cash FlowsIndirect Method
Peoria Corp. just completed another successful year, as indicated by the following income statement:
For the Year Ended December 31, 2017 | |
Sales revenue | $1,250,000 |
Cost of goods sold | 700,000 |
Gross profit | $550,000 |
Operating expenses | 150,000 |
Income before interest and taxes | $400,000 |
Interest expense | 25,000 |
Income before taxes | $375,000 |
Income tax expense | 150,000 |
Net income | $225,000 |
Presented here are comparative balance sheets:
December 31 | |||
2017 | 2016 | ||
Cash | $52,000 | $90,000 | |
Accounts receivable | 180,000 | 130,000 | |
Inventory | 230,000 | 200,000 | |
Prepayments | 15,000 | 25,000 | |
Total current assets | $477,000 | $445,000 | |
Land | $750,000 | $600,000 | |
Plant and equipment | 700,000 | 500,000 | |
Accumulated depreciation | (250,000) | (200,000) | |
Total long-term assets | $1,200,000 | $900,000 | |
Total assets | $1,677,000 | $1,345,000 | |
Accounts payable | $130,000 | $148,000 | |
Other accrued liabilities | 68,000 | 63,000 | |
Income taxes payable | 90,000 | 110,000 | |
Total current liabilities | $288,000 | $321,000 | |
Long-term bank loan payable | $350,000 | $300,000 | |
Common stock | $550,000 | $400,000 | |
Retained earnings | 489,000 | 324,000 | |
Total stockholders' equity | $1,039,000 | $724,000 | |
Total liabilities and stockholders' equity | $1,677,000 | $1,345,000 |
Other information is as follows:
Dividends of $60,000 were declared and paid during the year.
Operating expenses include $50,000 of depreciation.
Land and plant and equipment were acquired for cash, and additional stock was issued for cash. Cash also was received from additional bank loans.
The president has asked you some questions about the year's results. She is very impressed with the profit margin of 18% (net income divided by sales revenue). She is bothered, however, by the decline in the company's cash balance during the year. One of the conditions of the existing bank loan is that the company maintain a minimum cash balance of $50,000.
Required:
1. Prepare a statement of cash flows for 2017 using the indirect method in the Operating Activities section. Use the minus sign to indicate cash payments, cash outflows, or decreases in cash.
Peoria Corp. | |
Statement of Cash Flows | |
For the Year Ended December 31, 2017 | |
Cash Flows from Operating Activities | |
Net income | $ |
Adjustments to reconcile net income to net cash provided by operating activities: | |
Depreciation expense | |
Increase in accounts receivable | |
Increase in inventory | |
Decrease in prepayments | |
Decrease in accounts payable | |
Increase in other accrued liabilities | |
Decrease in income taxes payable | |
Net cash provided by operating activities | $ |
Cash Flows from Investing Activities | |
Acquisition of land | $ |
Acquisition of plant and equipment | |
Net cash used by investing activities | $ |
Cash Flows from Financing Activities | |
Additional long-term borrowings | $ |
Issuance of common stock | |
Cash dividends paid | |
Net cash provided by financing activities | $ |
Net decrease in cash | $ |
Cash balance, December 31, 2016 | |
Cash balance, December 31, 2017 | $ |
Feedback
The indirect method involves reporting net cash flow from operating activities and is computed by adjusting net income to remove the effect of all deferrals of past operating cash receipts and payments and all accruals of future operating cash receipts and payments. The sum of operating, investing, and financing activities must equal the net change in cash.
2. During the year Peoria experienced a decrease in cash at the end of the year due to collections on account of sales being less than sales for the year.
Feedback
Correct
Feedback
Partially correct
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