Statement of Cash Flows Using Indirect and Direct Methods

P14-7A

Prepare a statement of cash flows using the indirect method.
The financial statement of Ernest Banks Company appear below.

Ernest Banks Company
Comparative Balance sheets
December 31

Assets 2006 2005
Cash $23,000 $13,000
Accounts receivable 24,000 33,000
Merchandise inventory 20,000 27,000
Prepaid expenses 20,000 13,000
Land 40,000 40,000
Property, plant, and equipment 200,000 225,000
Less: Accumulated depreciation (50,000) (67,500)
Total $277,000 $283,500
Liabilities and Stockholders Equity
Accounts payable $ 9,000 $ 18,500
Accrued expenses payable 9,500 7,500
Interest payable 1,000 1,500
Income taxes payable 3,000 2,000
Bonds payable 50,000 80,000
Common stock 123,000 105,000
Retained earnings 81,500 69,000
Total $277,000 $283,500

Ernest Banks Company
Income Statement
For the Year Ended December 31, 2006

Revenues
Sales $ 600,000
Gain on sale of plant assets 2,500 $602,500
Less: Expenses
Cost of goods sold 500,000
Operating expense (excluding depreciation) 60,000
Depreciation expense 7,500
Interest expense 5,000
Income tax expense 9,000 581,500
Net income $ 21,000

Additional information:
1. Plant assets were sold at a sales price of $62,500
2. Additional equipment was purchased at a cost of $60,000.
3. Dividends of $8,500 were paid
4. All sales and purchases were on account.
5. Bonds were redeemed at face value.
6. Additional shares of stock were issued for cash.

Instructions:

Prepare a statement of cash flows for Ernest Banks Company for the year ended December 31, 2006, using the indirect method.

Net cash provided by operating activities $28,000

Investing activities provided $2,500

2.- Prepare a statement of cash flows - direct method

Data for Ernest Banks Company is presented in P14-7A. Further analysis reveals the following:
1. Accounts payable relates to merchandise creditors.
2. All operating expenses, except depreciation expense, were paid in cash.

Instructions:
Prepare a statement of cash flows for Ernest Banks Company for the year ended December 31, 2006, using the direct method.

Net cash provided by operating activities $28,000

Investing activities provided $2,500