Dec. 31, 2014 Dec. 31, 2013
Assets
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 70,720 $ 47,940
Accounts receivable (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 207,230 188,190
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 298,520 289,850
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 102,000
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 295,800 0
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 438,600 358,020
Accumulated depreciation—equipment . . . . . . . . . . . . . . . . . . . . . (99,110) (84,320)
$1,211,760 $ 901,680
Liabilities and Stockholders’ Equity
Accounts payable (merchandise creditors) . . . . . . . . . . . . . . . . . . . $ 205,700 $ 194,140
Accrued expenses payable (operating expenses) . . . . . . . . . . . . . 30,600 26,860
Dividends payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,500 20,400
Common stock, $1 par . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 202,000 102,000
Paid-in capital: Excess of issue price over par—common stock . . . . . 354,000 204,000
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 393,960 354,280
$1,211,760 $ 901,680
The income statement for the year ended December 31, 2014, is as follows:Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,023,898
Cost of merchandise sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,245,476
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 778,422
Operating expenses:
Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,790
Other operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 517,299
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 532,089
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 246,333
Other expenses:
Loss on sale of investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (10,200)
Income before income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 236,133
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94,453
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 141,680
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 $91,800 cash.
d. The common stock was issued for cash.
e. There was a $102,000 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:
MERRICK EQUIPMENT CO.
Statement of Cash Flows
For the Year Ended December 31, 2014
Cash flows from operating activities:
Cash received from customers1 $2,004,858
Deduct: Cash payments for merchandise2 $1,242,586
Cash payments for operating
expenses3 513,559
Cash payments for income taxes 94,453 1,850,598
Net cash flow from operating activities $ 154,260
Cash flows from investing activities:
Cash received from sale of investments $ 91,800
Less: Cash paid for purchase of land $ 295,800
Cash paid for purchase of
equipment 80,580 376,380
Net cash flow used for investing activities (284,580)
Cash flows from financing activities:
Cash received from sale of common stock $ 250,000
Less: Cash paid for dividends* 96,900
Net cash flow from financing activities 153,100
Increase in cash $ 22,780
Cash at the beginning of the year 47,940
Cash at the end of the year $ 70,720
Reconciliation of Net Income with Cash Flows from Operating Activities:
Net income……………………………………………………………………………… $141,680
Adjustments to reconcile net income to net cash flow
from operating activities:
Depreciation……………………………………………………………………… 14,790
Loss on sale of investments………………………………………………… 10,200
Changes in current operating assets and liabilities:
Increase in accounts receivable…………………………………………… (19,040)
Increase in inventories……………………………………………………… (8,670)
Increase in accounts payable……………………………………………… 11,560
Increase in accrued expenses payable………………………………… 3,740
Net cash flow from operating activities…………………………………………… $154,260
* Dividends paid: $102,000 + $20,400 – $25,500 = $96,900
Computations:
1. Sales…………………………………………………………………………………… $2,023,898
Deduct increase in accounts receivable………………………………………… 19,040
Cash received from customers…………………………………………………… $2,004,858
2. Cost of merchandise sold………………………………………………………… $1,245,476
Add increase in inventories……………………………………………………… 8,670
$1,254,146
Deduct increase in accounts payable…………………………………………… 11,560
Cash payments for merchandise………………………………………………… $1,242,586
3. Operating expenses other than depreciation………………………………… $ 517,299
Deduct increase in accrued expenses payable………………………………… 3,740
Cash payments for operating expenses………………………………………… $ 513,559