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Question:

Accounting

by | Jul 10, 2020 | QUESTIONS & ANSWERS

Cash flow information: Direct and indirect methods
The comparative year-end balance sheets of USA Graphics, Inc., revealed the following activity in the company’s current accounts:

20X8

20X7

Increase / Decrease)

Current assets

Cash

$55,400

$35,200

$20,200

Accounts receivable (net)

83,800

88,000

-4,200

Inventory

243,400

233,800

9,600

Prepaid expenses

25,400

24,200

1,200

Current liabilities

Accounts payable

$123,600

$140,600

($17,000)

Taxes payable

43,600

49,200

-5,600

Interest payable

9,000

6,400

2,600

Accrued liabilities

38,800

60,400

-21,600

Note payable

44,000

44,000

The accounts payable were for the purchase of merchandise. Prepaid expenses and accrued liabilities relate to the firm’s selling and administrative expenses. The company’s condensed income statement follows.

USA GRAPHICS INC.

Income Statement

for the Year Ended December 31, 20X8

Sales

$691,800

Less: Cost of goods sold

223,000

Gross profit

$468,800

Less: Selling & administrative expenses

$177,000

Depreciation expense

18,000

Interest expense

27,000

222,000

Add: gain on sale of land

$246,800

18,800

Income before taxes

$265,600

Income taxes

38,300

Net income

$227,300

Other data:

1. Long-term investments were purchased for cash at a cost of $64,200.

2. Cash proceeds from the sale of land totaled $74,200.

3. Store equipment of $34,000 was purchased by signing a short-term note payable. Also, a $140,000 telecommunications system was acquired by issuing 3,000 shares of preferred stock.

4. A long-term note of $42,200 was repaid.

5. Twenty thousand shares of common stock were issued at $5.19 per share.

6. The company paid cash dividends amounting to $125,000.

Instructions:

a. Prepare the operating activities section of the company’s statement of cash flows, assuming use of:

1. The direct method.

2. The indirect method.

b. Prepare the investing and financing activities sections of the statement of cash flows.

Attachments:


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