PR 16-1A Statement of cash flows—indirect method

The comparative balance sheet of Charles Inc. for December 31, 2014 and 2013, is shown as follows:


Dec. 31, 2014 Dec. 31, 2013
Assets
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 469,320 $ 439,440
Accounts receivable (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170,880 156,720
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 481,320 462,840
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 180,000
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 246,000 0
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 528,840 414,840
Accumulated depreciation—equipment . . . . . . . . . . . . . . . . . . . . . . . . . . (124,800) (111,000)
$1,771,560 $1,542,840
Liabilities and Stockholders’ Equity
Accounts payable (merchandise creditors) . . . . . . . . . . . . . . . . . . . . . . . . $ 318,360 $ 303,720
Accrued expenses payable (operating expenses) . . . . . . . . . . . . . . . . . . 31,680 39,480
Dividends payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,000 14,400
Common stock, $2 par . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95,000 75,000
Paid-in capital: Excess of issue price over par—common stock . . . . . . 290,000 210,000
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,018,520 900,240
$1,771,560 $1,542,840


Additional data obtained from an examination of the accounts in the ledger for 2014 are as follows:
a. The investments were sold for $210,000 cash.
b. Equipment and land were acquired for cash.
c. There were no disposals of equipment during the year.
d. The common stock was issued for cash.
e. There was a $190,280 credit to Retained Earnings for net income.
f. There was a $72,000 debit to Retained Earnings for cash dividends declared.

Instructions
Prepare a statement of cash flows, using the indirect method of presenting cash flows from operating activities.


Answer:




CHARLES INC.
Statement of Cash Flows
For the Year Ended December 31, 2014
Cash flows from operating activities:
Net income $ 190,280
Adjustments to reconcile net income to
net cash flow from operating activities:
Depreciation 13,800
Gain on sale of investments (30,000)
Changes in current operating assets
and liabilities:
Increase in accounts receivable (14,160)
Increase in inventories (18,480)
Increase in accounts payable 14,640
Decrease in accrued expenses
payable (7,800)
Net cash flow from operating activities $ 148,280
Cash flows from investing activities:
Cash received from sale of investments $ 

210,000
Less: Cash paid for purchase of land $(246,000)
Cash paid for purchase of
equipment (114,000) (360,000)
Net cash flow used for investing activities (150,000)
Cash flows from financing activities:
Cash received from sale of common stock $ 100,000
Less cash paid for dividends* (68,400)
Net cash flow from financing activities 31,600
Increase in cash $ 29,880
Cash at the beginning of the year 439,440
Cash at the end of the year $ 469,320
*$72,000 + $14,400 – $18,000 = $68,400
CHARLES INC.
Spreadsheet (Work Sheet) for Statement of Cash Flows
For the Year Ended December 31, 2014
Account Title
Balance
Dec. 31, 2013
Transactions Balance
Debit Credit Dec. 31, 2014
Cash 439,440 (m) 29,880 469,320
Accounts receivable (net) 156,720 (l) 14,160 170,880
Inventories 462,840 (k) 18,480 481,320
Investments 180,000 (j) 180,000 0
Land 0 (i) 246,000 246,000
Equipment 414,840 (h) 114,000 528,840
Accum. depr.—equipment (111,000) (g) 13,800 (124,800)
Accounts payable (303,720) (f) 14,640 (318,360)
Accrued expenses payable (39,480) (e) 7,800 (31,680)
Dividends payable (14,400) (d) 3,600 (18,000)
Common stock, $2 par (75,000) (c) 20,000 (95,000)
Paid-in capital in excess
of par—common stock (210,000) (c) 80,000 (290,000)
Retained earnings (900,240) (b) 72,000 (a) 190,280 (1,018,520)
Totals 0 502,320 502,320 0
Operating activities:
Net income (a) 190,280
Depreciation (g) 13,800
Gain on sale of investments (j) 30,000
Increase in accounts
receivable (l) 14,160
Increase in inventories (k) 18,480
Increase in accounts payable (f) 14,640
Decrease in accrued expenses
payable (e) 7,800
Investing activities:
Purchase of equipment (h) 114,000
Purchase of land (i) 246,000
Sale of investments (j) 210,000
Financing activities:
Declaration of cash dividends (b) 72,000
Sale of common stock (c) 100,000
Increase in dividends payable (d) 3,600
Net increase in cash (m) 29,880
Totals 532,320 532,320
The letters in the debit and credit columns are included for reference purposes. They do
not correspond to the letters in the additional data section of this problem.