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# Statement of Cash Flows (Indirect Method); Cash-Basis Ratios

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The Financial Statements of Frank B Robinson Company appear below:
FRANK B. ROBINSON COMPANY
Comparative Balance Sheets
31-Dec

Assets 2002 2001
Cash 29,000 13,000
Accounts receivable 28,000 14,000
Merchandise inventory 25,000 35,000
Property, plant, and equipment 60,000 78,000
Accumulated depreciation (20,000) (24,000)
Total 122,000 116,000

Liabilities and Stockholders' Equity
Accounts payable 27,000 23,000
Income taxes payable 5,000 8,000
Bonds payable 27,000 33,000
Common stock 18,000 14,000
Retained earnings 45,000 38,000
Total 122,000 116,000

FRANK B. ROBINSON COMPANY
Income Statement
For the Year Ended December 31, 2002
Sales 220,000
Cost of goods sold 180,000
Gross profit 40,000
Selling expenses 14,000
Income from operations 16,000
Interest expense 2,000
Income before income taxes 14,000
Income tax expense 4,000
Net income 10,000

?Â Â Â Â Â Â Â Â Â  Dividends declared and paid were \$3,000
?Â Â Â Â Â Â Â Â Â  During the year equipment was sold for \$ 8,500 cash. The equipment cost \$ 18,000 originally and had a book value of \$ 8500 at the time of sale
?Â Â Â Â Â Â Â Â Â  All depreciation are in the selling expenses category
?Â Â Â Â Â Â Â Â Â  All sales and purchases are on account

Instructions:

(a) Prepare a statement of cash flows using the indirect method
(b) Computer the following cash-basis ratios:
- Current caseh debt coverage ratio
- Cash return on sales ratio
- Cash debt coverage ratio

#### Solution Preview

see attached file

We need to calculate the depreciation for the year
Purchase price of the machine sold: \$18,000
Book value of the machine sold: \$8,500
Therefore accumulated depreciation of the machine sold= \$9,500 =18000-8500

Accumalated depreciation at the end of period = Accumalated depreciation at the beginning of period + Depreciation for the period - accumulated depreciation of the machine sold

or 20000 = 24000 + Depreciation expense- \$9,500
or Depreciation expense = \$5,500 =20000-24000+9500

Therefore depreciation expense for the period= \$5,500

The Cash Flows from the sale of equipment = \$8,500
(During the year equipment was sold for \$8,500 cash. This equipment cost \$18,000 originally and had a book value of \$8,500 at the time of sale.)

(a) Prepare a statement of cash flows using the indirect method.

FRANK B. ROBINSON COMPANY
Statement of Cash Flows - Indirect Method
For the year ending ...

#### Solution Summary

Statement of Cash Flows is prepared using Indirect Method. Also cash-basis ratios (Current caseh debt coverage ratio, Cash return on sales ratio, Cash debt coverage ratio) are calculated.

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