C. Pat Gibson Company Accrual Basis Income Statement For the Year Ended December

Question

C. Pat Gibson Company Accrual Basis Income Statement For the Year Ended December 31, 2012 Net sales Expenses $900,000 Cost of goods sold Selling and administrative expense Total expenses Income before income taxes Income taxes Net income 550,000 133,000 $683,000 217,000 65,400 $151,600 Other data: a. Cost of goods sold includes depreciation expense of $20,000. b. Selling and administrative expense includes goodwill amortization of $10,000. c. Decrease in deferred income taxes (a liability account), $5,000. d. Increase in accounts receivable, $20,000. e. Increase in accounts payable, $10,000. f. Increase in inventories, $30,000. g. Decrease in income taxes payable, $20,000. Required: Prepare a cash basis income statement. Prepare the cash flows from operating activities using the indirect approach a. b.

Explanation / Answer

Solution: a. Statement of Cash basis income statement Collection from customers: Sales $900,000 Less: Increase in accounts receivable ($20,000) $880,000 Cash paid for merchandise: Cost of goods sold 550,000 Increase in inventories 30,000 Less: Increase in accounts payable ($10,000) Less: Depreciation expense ($20,000) ($550,000) Cash payments for selling and administrative: Selling and administrative expense $133,000 Less: Goodwill amortization ($10,000) ($123,000) Cash payments for income taxes: Income taxes $65,400 Decrease in deferred income taxes $5,000 Decrease in income taxes payable $20,000 ($90,400) Total cash paid ($763,400) Net cash inflow $116,600 Working Notes: Notes: In Cash basis income statement we get net income is the net of total cash collection during the period and total cash paid during the period. Statement of Cash basis income statement Collection from customers: Sales $900,000 Less: Increase in accounts receivable ($20,000) $880,000 1 [sales on credit increase accounts receivable] Cash paid for merchandise: Cost of goods sold 550,000 Increase in inventories 30,000 Less: Increase in accounts payable ($10,000) Less: Depreciation expense ($20,000) ($550,000) 2 [it was included in Cost of goods sold.] Cash payments for selling and administrative: Selling and administrative expense $133,000 Less: Goodwill amortization ($10,000) ($123,000) 3 [it was included in Selling and administrative.] Cash payments for income taxes: Income taxes $65,400 Decrease in deferred income taxes $5,000 [it is also paid during the period] Decrease in income taxes payable $20,000 ($90,400) 4 [it is also paid during the period] Total cash paid ($763,400) 5=2+3+4 Net cash inflow $116,600 6=5+1 Notes: amounts brackets are negative denote cash outflow.] b. Cash Flows from Operating Activities Net income $151,600 Adjustments to reconcile net income to cash provided by operating activities: Depreciation $20,000 Goodwill amortization $10,000 Decrease in deferred income taxes ($5,000) Increase in accounts receivable ($20,000) Increase in accounts payable $10,000 Increase in inventories ($30,000) Decrease in income taxes payable ($20,000) Net cash provided by operating activities $116,600 Working Notes: Amounts in brackets are negative cash , means cash outflow form operating activities , those positive are non cash expenses or increase in cash flow due to operating activities. Please feel free to ask if anything about above solution in comment section of the question.

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