PR 16-4A Statement of cash flows—direct method

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


Dec. 31, 2014 Dec. 31, 2013
Assets
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 643,400 $ 679,400
Accounts receivable (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 566,800 547,400
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,011,000 982,800
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 240,000
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 520,000 0
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 880,000 680,000
Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (244,400) (200,400)
$3,376,800 $2,929,200
Liabilities and Stockholders’ Equity
Accounts payable (merchandise creditors) . . . . . . . . . . . . . . . . . . . . . . . . $ 771,800 $ 748,400
Accrued expenses payable (operating expenses) . . . . . . . . . . . . . . . . . . 63,400 70,800
Dividends payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,800 6,400
Common stock, $2 par . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56,000 32,000
Paid-in capital: Excess of issue price over par—common stock . . . . . . 408,000 192,000
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,068,800 1,879,600
$3,376,800 $2,929,200
The income statement for the year ended December 31, 2014, is as follows:

Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,980,000
Cost of merchandise sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,452,000
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,528,000
Operating expenses:
Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 44,000
Other operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,100,000
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,144,000
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 384,000
Other expense:
Loss on sale of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (64,000)
Income before income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 320,000
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102,800
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 217,200



Additional data obtained from an examination of the accounts in the ledger for 2014 are as follows:
a. Equipment and land were acquired for cash.
b. There were no disposals of equipment during the year.
c. The investments were sold for $176,000 cash.
d. The common stock was issued for cash.
e. There was a $28,000 debit to Retained Earnings for cash dividends declared.

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


Answer:




CANACE PRODUCTS INC.
Statement of Cash Flows
For the Year Ended December 31, 2014
Cash flows from operating activities:
Cash received from customers1 $5,960,600
Deduct: Cash payments for merchandise2 $2,456,800
Cash payments for operating
expenses3 3,107,400
Cash payments for income taxes 102,800 5,667,000
Net cash flow from operating activities $ 293,600
Cash flows from investing activities:
Cash received from sale of investments $ 176,000
Less: Cash paid for purchase of land $ (520,000)
Cash paid for purchase of
equipment (200,000) (720,000)
Net cash flow used for investing activities (544,000)
Cash flows from financing activities:
Cash received from sale of common stock $ 240,000
Less cash paid for dividends* 25,600
Net cash flow from financing activities 214,400
Decrease in cash $ (36,000)
Cash at the beginning of the year 679,400
Cash at the end of the year $ 643,400
Reconciliation of Net Income with Cash Flows from Operating Activities:
Net income…………………………………………………………………………………… $217,200
Adjustments to reconcile net income to net cash flow
from operating activities:
Depreciation…………………………………………………………………………… 44,000
Loss on sale of investments………………………………………………………… 64,000
Changes in current operating assets and liabilities:
Increase in accounts receivable………………………………………………… (19,400)
Increase in inventories…………………………………………………………… (28,200)
Increase in accounts payable…………………………………………………… 23,400
Decrease in accrued expenses payable……………………………………… (7,400)
Net cash flow from operating activities………………………………………………… $293,600
* Dividends paid: $28,000 + $6,400 – $8,800 = $25,600
Computations:
1. Sales…………………………………………………………………………………… $5,980,000
Deduct increase in accounts receivable………………………………………… 19,400
Cash received from customers…………………………………………………… $5,960,600
2. Cost of merchandise sold………………………………………………………… $2,452,000
Add increase in inventories………………………………………………………… 28,200
$2,480,200
Deduct increase in accounts payable…………………………………………… 23,400
Cash payments for merchandise………………………………………………… $2,456,800
3. Operating expenses other than depreciation…………………………………… $3,100,000
Add decrease in accrued expenses payable…………………………………… 7,400
Cash payments for operating expenses………………………………………… $3,107,400