PB12-3 Preparing a Statement of Cash Flows (Indirect Method) [LO 12-2, LO 12-3,

Question

PB12-3 Preparing a Statement of Cash Flows (Indirect Method) [LO 12-2, LO 12-3, LO 12-4, LO 12-5] Audio City, Inc. is developing its annual financial statements at December 31. The statements are complete except for the statement of cash flows. The completed comparative balance sheets and income statement are summarized below: Current Year Previous Year Balance Sheet at December 31 Cash $ 47,500 $ 54,000 Accounts Receivable 13,000 17,500 Inventory 19,000 17,500 Equipment 213,000 145,000 Accumulated Depreciation–Equipment (52,500 ) (40,000 ) $ 240,000 $ 194,000 Accounts Payable $ 7,500 $ 18,000 Salaries and Wages Payable 2,000 1,000 Note Payable (long-term) 57,500 70,000 Common Stock 90,000 65,000 Retained Earnings 83,000 40,000 $ 240,000 $ 194,000 Income Statement Sales Revenue $ 185,000 Cost of Goods Sold 85,000 Other Expenses 52,500 Net Income $ 47,500 Additional Data: a. Bought equipment for cash, $68,000. b. Paid $12,500 on the long-term note payable. c. Issued new shares of stock for $25,000 cash. d. Dividends of $4,500 were paid in cash. e. Other expenses included depreciation, $12,500; salaries and wages, $17,500; taxes, $22,500. f. Accounts Payable includes only inventory purchases made on credit. Because a liability relating to taxes does not exist, assume that they were fully paid in cash. Required: 1. Prepare the statement of cash flows for the current year ended December 31 using the indirect method. (Amounts to be deducted should be indicated by a minus sign.)

Explanation / Answer

STATEMENT OF CASH FLOWS Cash flow from operating activities: Net income 47500 Adjustments to reconcile net income with net cash from operating activities: Depreciation 12500 Decrease in accounts receivable (17500-13000) 4500 Increase in inventory (19000-17500) -1500 Decrease in accounts payable (18000-7500) -10500 Increase in salaries and wages payable 1000 6000 Net cash from operating activities 53500 Cash flow from investing activities: Purchase of equipment -68000 Net cash used by investing activities -68000 Cash flow financing activities: Redemption of long term note -12500 Issue of stock 25000 Dividends paid -4500 Net cash from financing activities 8000 Decrease in cash and cash equivalents -6500 Beginning balance of cash and cash equivalents 54000 Ending balance of cash and cash equivalents 47500

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