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
The income statement for the year ended December 31, 2014, is as follows:
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,261,701
Cost of merchandise sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,237,970
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,023,731
Operating expenses:
Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,800
Other operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,722,798
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,736,598
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 287,133
Other income:
Gain on sale of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,000
Income before income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 317,133
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126,853
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 190,280
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 $72,000 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:
CHARLES INC.
Statement of Cash Flows
For the Year Ended December 31, 2014
Cash flows from operating activities:
Cash received from customers1 $5,247,541
Deduct: Cash payments for merchandise2 $3,241,810
Cash payments for operating
expenses3 1,730,598
Cash payments for income taxes 126,853 5,099,261
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 dividends4 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
Reconciliation of Net Income with 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
Computations:
1. Sales…………………………………………………………………………………… $5,261,701
Deduct increase in accounts receivable………………………………………… 14,160
Cash received from customers…………………………………………………… $5,247,541
2. Cost of merchandise sold………………………………………………………… $3,237,970
Add increase in inventories………………………………………………………… 18,480
$3,256,450
Deduct increase in accounts payable…………………………………………… 14,640
Cash payments for merchandise………………………………………………… $3,241,810
3. Operating expenses other than depreciation…………………………………… $1,722,798
Add decrease in accrued expenses payable…………………………………… 7,800
Cash payments for operating expenses………………………………………… $1,730,598
4. Cash dividends declared…………………………………………………………… $ 72,000
Deduct increase in dividends payable…………………………………………… 3,600
Cash payments for dividends……………………………………………………… $ 68,400