Chapter 12: Q11DQ (page 565)
Is depreciation a source of cash flow?
Depreciation is not a source of cash flow
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Refer to the information reported about Forten Company in Problem 12-3A.
Required
Prepare a complete statement of cash flows using a spreadsheet as in Exhibit 12A.1; report its operating activities using the indirect method. Identify the debits and credits in the Analysis of Changes columns with letters that correspond to the following list of transactions and events.
a. Net income was \(114,975.
b. Accounts receivable increased.
c. Inventory increased.
d. Prepaid expenses decreased.
e. Accounts payable decreased.
f. Depreciation expense was \)20,750.
g. Sold equipment costing \(46,875, with accumulated depreciation of \)30,125, for \(11,625 cash. This yielded a loss of \)5,125.
h. Purchased equipment costing \(96,375 by paying \)30,000 cash and (i.) by signing a long-term note payable for the balance.
j. Borrowed \(4,000 cash by signing a short-term note payable.
k. Paid \)50,125 cash to reduce the long-term notes payable.
l. Issued 2,500 shares of common stock for \(20 cash per share.
m. Declared and paid cash dividends of \)50,100.
Satu Company, a merchandiser, recently completed its 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, (5) Other Expenses are cash expenses, and (6) any change in Income Taxes Payable reflects the accrual and cash payment of taxes. The company’s balance sheets and income statement follow.
SATU COMPANY Comparative Balance Sheets December 31, 2017 and 2016 |
| 2017 | 2016 |
Assets: | ||
Cash | \(58,750 | \)28,400 |
Accounts receivables | 20,222 | 25,860 |
Total current assets | 78,972 | 54,260 |
Inventory | 165,667 | 140,320 |
Equipment | 107,750 | 77,500 |
Accumulated depreciation | (46,700) | (31,000) |
Total assets | \(305,689 | \)241,080 |
Liability and equity | ||
Account payable | \(20,372 | \)157,530 |
Income tax payable | 2,100 | 6,100 |
Total current liabilities | 22,472 | 163,630 |
Equity | ||
Common stock, \(5 par value | 40,000 | 25,000 |
Paid-in-capital in excess of par value, common stock | 68,000 | 20,000 |
Retained earnings | 175,217 | 32,450 |
Total liabilities and equity | \)305,689 | \(241,080 |
| SATU COMPANY Income Statement For Year Ended December 31, 2017 |
Sales | \)750,800 | |
Cost of goods sold | 269,200 | |
Gross profit | 481,600 | |
Operating expenses | ||
Depreciation expenses | 15,700 | |
Other expenses | 173,933 | 189,633 |
Income before taxes | 291,967 | |
Income tax expenses | 89,200 | |
Net income | \(202,767 |
Additional Information on Year 2017 Transactions
a. Purchased equipment for \)30,250 cash.
b. Issued 3,000 shares of common stock for \(21 cash per share.
c. Declared and paid \)60,000 of cash dividends.
Required
Prepare a complete statement of cash flows; report its cash inflows and cash outflows from operating activities according to the indirect method
The following selected information is from Ellerby Company’s comparative balance sheets.
At December 31 2017 2016
Furniture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . \(132,000 \) 184,500
Accumulated depreciation—Furniture . . . . . . (88,700) (110,700)
The income statement reports depreciation expense for the year of \(18,000. Also, furniture costing \)52,500 was sold for its book value. Compute the cash received from the sale of furniture.
What is the reporting purpose of the statement of cash flows? Identify at least two questions that this statement can answer.
Hampton Company reports the following information for its recent calendar year. Prepare the operating activities section of the statement of cash flows for Hampton Company using the indirect method.
| Income Statement Data | Selected Year-End Balance Sheet Data | ||
Sales | Accounts receivable increase | \(10,000 | |
Expenses | \)160,000 | Inventory decrease | 16,000 |
Cost of goods sold | 100,000 | Salaries payable increase | 1,000 |
Salaries expense | 24,000 | ||
Depreciation expense | 12,000 | ||
Net income | $ 24,000 | ||
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