Question

Forten Company, a merchandiser, recently completed its calendar-year 2017 operations. For the year, (1) all sales are credit sales, (2) all credits to Accounts Receivable reflect cash receipts from customers, (3) all purchases of inventory are on credit, (4) all debits to Accounts Payable reflect cash payments for inventory, and (5) Other Expenses are paid in advance and are initially debited to Prepaid Expenses. The company’s income statement and balance sheets follow.

FORTEN COMPANY Income Statement For year Ended 31 December, 2017

Sales		\(582,500
Cost of goods sold		(285,000)
Gross profit		297,500
Operating expenses
Depreciation expenses	\)20,750
Other expenses	132,400	153,150
Other gain (losses)
Loss on sale of equipment		(5,125)
Income before tax		139,225
Income tax expenses		24,250
Net income		\(114,975

FORTEN COMPANY Income Statement For year Ended 31 December, 2017

	2017	2016
Assets:
Cash	\)49,800	\(73,500
Accounts receivable	65,810	50,625
Inventory	275,656	251,800
Prepaid expenses	1,250	1,875
Total current assets	392,516	377,800
Equipment	157,500	108,000
Accumulated depreciation – equipment	(36,625)	(46,000)
Total assets	\)513,391	\(439,800
Liability and equity
Account payable	\)53,141	\(114,675
Short-term note payable	10,000	6,000
Total current liabilities	63,141	120,675
Long term note payable	65,000	48,750
Total liabilities	128,141	169,425
Equity
Common stock, \)5 par value	162,750	150,250
Paid-in-capital in excess of par – common stock	37,500	0
Retained earnings	185,000	120,125
Total liabilities and equity	\(513,391	\)439,800

Additional Information on Year 2017 Transactions

a. The loss on the cash sale of equipment was \(5,125 (details in b).

b. Sold equipment costing \)46,875, with accumulated depreciation of \(30,125, for \)11,625 cash.

c. Purchased equipment costing \(96,375 by paying \)30,000 cash and signing a long-term note payable for the balance.

d. Borrowed \(4,000 cash by signing a short-term note payable.

e. Paid \)50,125 cash to reduce the long-term notes payable.

f. Issued 2,500 shares of common stock for \(20 cash per share.

g. Declared and paid cash dividends of \)50,100.

Required

1. Prepare a complete statement of cash flows; report its operating activities using the indirect method. Disclose any noncash investing and financing activities in a note.

Analysis Component

2. Analyze and discuss the statement of cash flows prepared in part 1, giving special attention to the wisdom of the cash dividend payment.

Short answer

1. Cash flow from operation is$40,900.
2. Financing cash flow will be positive if the cash dividend is not paid by the business entity.

Step-by-step solution

Definition of Cash Dividend

A cash dividend can be defined as the cash payment made to the shareholder as their share of the profit generated by the business entity. It is deducted for the determination of ending retained earnings.

Statement of cash flow

Particular	Amount $	Amount $
Net income		$114,975
Add/Less: Adjustments to net income
Depreciation expenses	$20,750
Loss on sale of equipment	$5,125	25,875
Add/Less: Changes in current assets and liabilities
Increase in accounts receivable	(15,185)
Increase in inventory	(23,856)
Decrease in prepaid expenses	625
Decrease in accounts payable	(61,534)	(99,950)
Cash flow from operations		$40,900
Cash flow from investing activities:
Sale of equipment	$11,625
Purchase of equipment	($30,000)
Cash used in investing activities		($18,375)
Cash flow from financing activities:
Payment for long-term note payable	($50,125)
Issue of shares	50,000
Issue of short-term note payable	4,000
Payment of cash dividend	($50,100)
Cash used in financing activities		($46,225)
Net change in the cash		($23,700)
Opening cash balance		73,500
Closing cash balance		$49,800

Notes disclosure:

Non-cash investing and financing activity include the part payment made by the business entity to acquire equipment by issuing a long-term note payable.

Particular	Amount $
Equipment cost	$96,375
Cash payment	(30,000)
Long-term note payable	$66,375

Analysis of statement of cash flow

The business entity is generating positive cash flow from the operating activities, but the cash flow from the investing and financing activities is negative, which declines the business entity's cash balance compared to the previous year.

If the business entity has not paid any cash dividend, the cash flow from financing activities will reflect a positive cash flow.