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    Direct and Indirect Statements of Cash Flows

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    E23-3 (Preparation of Operating Activities Section—Indirect Method, Periodic Inventory) The income statement of Vince Gill Company is shown below.

    VINCE GILL COMPANY
    Income Statement
    For The Year Ended December 31, 2014
    Sales $6,900,000
    Cost of goods sold
    Beginning inventory $1,900,000
    Purchases 4,400,000
    Goods available for sale 6,300,000
    Ending inventory 1,600,000
    Cost of goods sold 4,700,000
    Gross profit 2,200,000
    Operating expenses
    Selling expenses 450,000
    Administrative expenses 700,000 1,150,000
    Net income $1,050,000

    Additional information:
    1. Accounts receivable decreased $310,000 during the year.
    2. Prepaid expenses increased $170,000 during the year.
    3. Accounts payable to suppliers of merchandise decreased $275,000 during the year.
    4. Accrued expenses payable decreased $120,000 during the year.
    5. Administrative expenses include depreciation expense of $60,000

    Instructions:
    Prepare the operating activities section of the statement of cash flows for the year ended December 31, 2014, for Rodriquez Company, using the indirect method.

    VINCE GILL COMPANY
    Partial Statement of Cash Flows
    For The Year Ended December 31, 2014
    Cash flows from operating activities
    Net income Amount
    "Adjustments to reconcile net income to net cash
    provided by operating activities:"

    Title Amount
    Title Amount
    Title Amount
    Title Amount
    Title Amount
    Title Amount Formula
    Net cash provided by operating activities Formula

    P23-3 (SCF—Direct Method) Mortonson Company has not yet prepared a formal statement of cash flows for the 2014 fiscal year. Comparative balance sheets as of December 31, 2013, and 2014, and a statement of income and retained earnings for the year ended December 31, 2014, are presented below.

    MORTONSON COMPANY
    Statement of Income and Retained Earnings
    For The Year Ended December 31, 2014
    ($000 Omitted)
    Sales $3,800
    Expenses
    Cost of goods sold $1,200
    Salaries and benefits 725
    Heat, light, and power 75
    Depreciation 80
    Property taxes 19
    Patent amortization 25
    Miscellaneous expenses 10
    Interest 30 2,164
    Income before income taxes 1,636
    Income taxes 818
    Net income 818
    Retained earnings - January 1, 2014 310
    1,128
    Stock dividend declared and issued 600
    Retained earnings - December 31, 2014 $528

    MORTONSON COMPANY
    Comparative Balance Sheet
    December 31
    ($000 Omitted)
    Assets 2014 2013
    Current assets
    Cash $333 $100
    U.S. Treasury notes (Available-for-sale) 10 50
    Accounts receivable 780 500
    Inventory 720 560
    Total current assets 1,843 1,210
    Long-term assets
    Land 150 70
    Buildings and equipment 910 600
    Accumulated depreciation (200) (120)
    Patents (less amortization) 105 130
    Total long-term assets 965 680
    Total assets $2,808 $1,890

    Liabilities and Stockholders' Equity
    Current liabilities
    Accounts payable $420 $330
    Income taxes payable 40 30
    Notes payable 320 320
    Total current liabilities 780 680
    Long-term notes payable - due 2016 200 200
    Total liabilities 980 880
    Stockholders' equity
    Common stock outstanding 1,300 700
    Retained earnings 528 310
    Total stockholders' equity 1,828 1,010
    Total liabilities and stockholders' equity $2,808 $1,890

    Instructions:
    Prepare a statement of cash flows using the direct method. Changes in accounts receivable and in accounts payable relate to sales and cost of sales. Do not prepare a reconciliation schedule.

    MORTONSON COMPANY
    Statement of Cash Flows
    For The Year Ended December 31, 2014
    ($000 omitted)
    Cash flows from operating activities
    Title Amount
    Title Amount
    Title Amount
    Title Amount
    Title Amount
    Title Amount
    Title Amount
    Title Amount Formula
    Net cash provided by operating activities Formula

    Cash flows from investing activities
    Title Amount
    Title Amount
    Title Amount
    Net cash used by investing activities Formula

    Increase in cash Amount
    Title Amount
    Title Formula

    (a) Sales Amount
    Title Amount
    Formula
    Add: Title Amount
    Cash receipts (collections from customers) Formula

    (b) Cost of goods sold Amount
    Add: Title Amount
    Title Formula
    Deduct: Title Amount
    Title Formula
    Deduct: Title Amount
    Formula
    Add: Title Amount
    Cash purchases (payments for merchandise) Formula

    (c) Income taxes Amount
    Title Amount
    Formula
    Add: Title Amount
    Income taxes (cash) Formula

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    https://brainmass.com/business/income-statement/direct-and-indirect-statements-of-cash-flows-587507

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    Solution Summary

    This solution illustrates how to prepare statements of cash flows using the direct and indirect methods, including using the cost of goods sold computation to convert accrual-basis cost of goods sold to cash-basis inventory purchases.

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