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Statement of Cash Flows: Indirect Method

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Sham Lama Fabrics, Inc.
Comparative Balance Sheets
December 31, 20x8 and 20x7

20x8 20x7

Assets

Cash $189,120 $ 54,720
Accounts receivable (net) 204,860 150,860
Inventory 225,780 275,780
Prepaid expenses --- 40,000
Land 50,000 ---
Building 274,000 ---
Accumulated depreciation, building (30,000) ---
Equipment 66,000 68,000
Accumulated depreciation, equipment (29,000) (48,000)
Patents _ 8,000__ 12,000_
Total assets $958,760 $553,360

Liabilities and Stockholders' equity
Accounts payable $ 21,500 $ 73,500
Notes payable (current) 20,000 ---
Accrued liabilities --- 24,600
Mortgage payable 324,000 ---
Common stock, $10 par value 360,000 300,000
Additional paid-in capital 114,400 74,400
Retained earnings 118,860 80,860
Total liabilities and stockholders' equity $958,760 $553,360

Additional information about Sham Lama Fabrics operations during 20x8 is as follows: (a) net income, $56,000; (b) building and equipment depreciation expense amounts, $30,000 and $6,000, respectively; (c) equipment that cost $27,000 with accumulated depreciation of $25,000 sold at a gain of $10,600; (d) equipment purchases, $25,000; (e) patent amortization,$6,000; purchase of patent, $2,000; (f) funds borrowed by issuing notes payable, $50,000; notes payable repaid, $30,000; (g) land and building purchased for $324,000 by signing a mortgage for the total cost; (h) 3,000 shares of $20 par value common stock issued for a total of $100,000; and (i) paid cash dividend, $18,000.

1. Using the indirect method, prepare a statement of cash flows for Sham Lama Fabrics Inc.

2. Why did Sham Lama Fabrics have an increase in cash of $134,400 when it recorded net income of only $56,000? Discuss and interpret.

3. Compute and assess cash flow yield and free cash flow for 20x8. What is your assessment of Sham Lama Fabric's cash-generating ability?

Solution Summary

The solution explains how to prepare the statement of cash flows using indirect method

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