Dec. 31, 2014 Dec. 31, 2013
Assets
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 661,920 $ 683,100
Accounts receivable (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 992,640 914,400
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,394,400 1,363,800
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 432,000
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 960,000 0
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,224,000 984,000
Accumulated depreciation—equipment . . . . . . . . . . . . . . . . . . . . . (481,500) (368,400)
$4,751,460 $4,008,900
Liabilities and Stockholders’ Equity
Accounts payable (merchandise creditors) . . . . . . . . . . . . . . . . . . . $1,080,000 $ 966,600
Accrued expenses payable (operating expenses) . . . . . . . . . . . . . 67,800 79,200
Dividends payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,800 91,200
Common stock, $5 par . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130,000 30,000
Paid-in capital: Excess of issue price over par—common stock . . . . . 950,000 450,000
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,422,860 2,391,900
$4,751,460 $4,008,900
The income statement for the year ended December 31, 2014, is as follows:
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,512,000Cost of merchandise sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,352,000
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,160,000
Operating expenses:
Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 113,100
Other operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,344,840
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,457,940
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 702,060
Other income:
Gain on sale of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156,000
Income before income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 858,060
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 299,100
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 558,960
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 $588,000 cash.
d. The common stock was issued for cash.
e. There was a $528,000 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:
MARTINEZ INC.
Statement of Cash Flows
For the Year Ended December 31, 2014
Cash flows from operating activities:
Cash received from customers1 $4,433,760
Deduct: Cash payments for
merchandise2 $2,269,200
Cash payments for operating
expenses3 1,356,240
Cash payments for income tax 299,100 3,924,540
Net cash flow from operating activities $ 509,220
Cash flows from investing activities:
Cash received from sale of investments $ 588,000
Less: Cash paid for land $ 960,000
Cash paid for equipment 240,000 1,200,000
Net cash flow used for investing activities (612,000)
Cash flows from financing activities:
Cash received from sale of common stock $ 600,000
Less: Cash paid for dividends* 518,400
Net cash flow from financing activities 81,600
Decrease in cash $ (21,180)
Cash at the beginning of the year 683,100
Cash at the end of the year $ 661,920
Reconciliation of Net Income with Cash Flows from Operating Activities:
Net income………………………………………………………………………………… $ 558,960
Adjustments to reconcile net income to net cash flow
from operating activities:
Depreciation expense……………………………………………………………… 113,100
Gain on sale of investments……………………………………………………… (156,000)
Changes in current operating assets and liabilities:
Increase in accounts receivable……………………………………………… (78,240)
Increase in inventories………………………………………………………… (30,600)
Increase in accounts payable………………………………………………… 113,400
Decrease in accrued expenses payable…………………………………… (11,400)
Net cash flow from operating activities……………………………………………… $ 509,220
* Dividends paid: $528,000 + $91,200 – $100,800 = $518,400
Computations:
1. Sales……………………………………………………………………………………… $4,512,000
Deduct increase in accounts receivable………………………………………… 78,240
Cash received from customers…………………………………………………… $4,433,760
2. Cost of merchandise sold…………………………………………………………… $2,352,000
Add increase in inventories………………………………………………………… 30,600
$2,382,600
Deduct increase in accounts payable…………………………………………… 113,400
Cash payments for merchandise…………………………………………………… $2,269,200
3. Operating expenses other than depreciation…………………………………… $1,344,840
Add decrease in accrued expenses payable…………………………………… 11,400
Cash payments for operating expenses………………………………………… $1,356,240