Dec. 31, 2014 Dec. 31, 2013
Assets
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 392 $128
Accounts receivable (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 224 160
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140 88
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 320 360
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180 140
Accumulated depreciation—equipment . . . . . . . . . . . . . . . . . . . . . . . . . (48) (24)
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,208 $852
Liabilities and Stockholders’ Equity
Accounts payable (merchandise creditors) . . . . . . . . . . . . . . . . . . . . . . . $ 140 $128
Dividends payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 —
Common stock, $10 par . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 40
Paid-in capital: Excess of issue price over par—common stock . . . . . 200 100
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 764 584
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,208 $852
The following additional information is taken from the records:
1. Land was sold for $100.
2. Equipment was acquired for cash.
3. There were no disposals of equipment during the year.
4. The common stock was issued for cash.
5. There was a $260 credit to Retained Earnings for net income.
6. There was an $80 debit to Retained Earnings for cash dividends declared.
a. Prepare a statement of cash flows, using the indirect method of presenting cash flows from operating activities.
b. Was Wedge Industries Inc. net cash flow from operations more or less than net income? What is the source of this difference?
Answer:
a.
WEDGE INDUSTRIES INC.
Statement of Cash Flows
For the Year Ended December 31, 2014
Cash flows from operating activities:
Net income $260
Adjustments to reconcile net income to net
cash flow from operating activities:
Depreciation 24
Gain on sale of land (60)
Changes in current operating assets and
liabilities:
Increase in accounts receivable (64)
Increase in inventories (52)
Increase in accounts payable 12
Net cash flow from operating activities $120
Cash flows from investing activities:
Cash received from sale of land $100
Less cash paid for purchase of equipment 40
Net cash flow from investing activities 60
Cash flows from financing activities:
Cash received from sale of common stock $140
Less cash paid for dividends* 56
Net cash flow from financing activities 84
Increase in cash $264
Cash at the beginning of the year 128
Cash at the end of the year $392
* $80 – $24 = $56
b. Wedge Industries Inc.’s net income was more than the cash flows from operations
because of:
● $24 of depreciation expense which has no effect on cash.
● A $60 gain on the sale of land. The proceeds from this sale of $100, which include
the gain, are reported in the Investing Activities section of the statement of cash
flows.
● Changes in current operating assets and liabilities that are added or deducted,
depending on their effect on cash flows:
Increase in accounts receivable, $64 deducted
Increase in inventories, $52 deducted
Increase in accounts payable, $12 added