Statement of Cash Flows—Indirect Method The comparative balance sheet of Merrick

Question

Statement of Cash Flows—Indirect Method

The comparative balance sheet of Merrick Equipment Co. for December 31, 20Y9 and 20Y8, is as follows:

Additional data obtained from an examination of the accounts in the ledger for 20Y9 are as follows:

Equipment and land were acquired for cash.

There were no disposals of equipment during the year.

The investments were sold for $101,980 cash.

The common stock was issued for cash.

There was a $71,940 credit to Retained Earnings for net income.

There was a $45,520 debit to Retained Earnings for cash dividends declared.

Required:

Prepare a statement of cash flows, using the indirect method of presenting cash flows from operating activities. Use the minus sign to indicate cash out flows, cash payments, decreases in cash, or any negative adjustments.

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The statement of cash flows reports three types of cash flow activities, as follows:
1. Cash flows from operating activities are the cash flows from transactions that affect the net income of the company.
2. Cash flows from (used for) investing activities are the cash flows received from or used for transactions that affect investments in the noncurrent assets of the company.
3. Cash flows from (used for) financing activities are the cash flows received from or used for transactions that affect the debt and equity of the company.

The indirect method reports cash flows from operating activities by beginning with net income and adjusting it for revenues and expenses that do not involve the receipt or payment of cash. A primary advantage of the indirect method is that it reconciles the differences between net income and net cash flows from operations.

Calculate the increases and decreases in the current asset/liability accounts over the period. How do these increases or decreases impact the amount of cash a company has? Were there any purchases or sales of noncurrent assets during the year? If there were any sales of noncurrent assets, were these noncurrent assets sold at what the company had initially paid? Or were the assets sold for more or less than the book value? Did the company engage in any activities that affected the equity or debt in their company?

Dec. 31, 20Y9 Dec. 31, 20Y8 Assets Cash $293,310 $275,050 Accounts receivable (net) 106,260 98,790 Inventories 299,950 292,480 Investments 0 113,310 Land 153,850 0 Equipment 330,950 258,590 Accumulated depreciation—equipment (77,480) (69,730) Total assets $1,106,840 $968,490 Liabilities and Stockholders' Equity Accounts payable $200,340 $190,790 Accrued expenses payable 19,920 25,180 Dividends payable 11,070 8,720 Common stock, $10 par 59,770 47,460 Paid-in capital: Excess of issue price over par-common stock 224,690 131,710 Retained earnings 591,050 564,630 Total liabilities and stockholders’ equity $1,106,840 $968,490

Explanation / Answer

Merrick Equipment Statement of Cash Flows for the year ended December 31,2015 Cash flows from Operating Activities Net income for the year 71,940 Adjustments to reconcile net income to net cash provided by operating activities Depreciation expense 7,750 increase in Accounts receivable -7470 increase in inventory -7470 loss on sale of investment 11,330 increase in accounts payable 9550 Decrease in accrued expenses payable -5260 8,430 Net cash flow from operating activities 80,370 Cash flows from Investing Activities: cash from sale of investmentss 101,980 Cash used for purchase of land -153,850 cash used for purchase of Equipment -72,360 Net cash used by investing activities -124,230 Cash flows from financing activities cash from common stock issue 105,290 Cash dividend paid -43,170 net cash flow from financing activities 62,120 Net increase in cash 18,260 cash at the beginning of the year 275,050 cash at year end 293,310

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