Stegner Inc. reported net income of $130,000 for the year ended December 31, 200

Question

Stegner Inc. reported net income of $130,000 for the year ended December 31, 2008. The following items were included on Stegner's balance sheets for December 31, 2008 and 2007: 12/31/2008 12/31/2007 Cash $105,000 $110,000 Accounts Receivable 223,000 83,000 Notes Receivable 95,000 100,000 Stegner uses the indirect method to prepare its statement of cash flows. Stegner does not have any other current assets or current liabilities and did not enter into any investing or financing activities during 2008. Required 1. Prepare Stegner's 2008 statement of cash flows. 2. Draft a brief memo to the owner to explain why cash decreased during a profitable year.

Explanation / Answer

Required 1. Prepare Stegner’s 2008 statement of cash flows. Stegner, Inc. Statement of Cash Flows For the Year Ended December 31, 2008 Net income $130,000.00 Adjustments Increase in accounts receivable ($140,000.00) Decrease in notes receivable $5,000.00 ($135,000.00) Cash flows from operating activities ($5,000.00) Cash, December 31, 2007 $110,000.00 Cash, December 31, 2008 $105,000.00 2. Draft a brief memo to the owner to explain why cash decreased during a profitable year. "To: Owner of Stegner, Inc. From: Michael Atkins, Accountant Date: December 13, 2010 Re: Statement of Cash Flows For the Year Ended December 31, 2008 The reason why cash decreased during a profitable year in 2008 is that accounts receivable increased significantly this year, but Stegner, Inc. did not collect on these accounts. Your income statement was prepared using accrual accounting which listed net income of $130,000. Since accounts receivable increased by $140,000, that left Stegner, Inc. with a $10,000 decrease in cash flows from operating activities for 2008. This was offset by a $5,000 decrease in notes receivable for a total decrease in Stegner's cash balance of $5,000 in 2008.

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