Question

Preparing the statement of cash flows—indirect method with non-cash transactions the 2018 income statement and comparative balance sheet of Sweet Valley, Inc. follow:

Additionally, Sweet Valley purchased land of \(20,900 by financing it 100% with long-term notes payable during 2018. During the year, there were no sales of land, no retirements of stock, and no treasury stock transactions. A plant asset was disposed of for \)0. The cost and the accumulated depreciation of the disposed asset were $13,240. Plant asset was acquired for cash.

Requirements

1. Prepare the 2018 statement of cash flows, formatting operating activities by the indirect method.

2. How will what you learned in this problem help you evaluate an investment?

Short answer

1. Net cash from operating activities is $136,300.
2. Cash flow statement indicating that company has enough liquidity to run business efficiently.

Step-by-step solution

Statement of cash flows using the indirect method

SWEET VALLEY, INC. Statement of Cash Flows For the year ended December 31, 2018

Cash Flows From Operating Activities:
Net Income	$107,500
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Add: Depreciation expense	$14,500
Less: Increase in account receivables	($1,300)
Add: Decrease in merchandise inventory	$12,000
Add: Increase in account payable	$5,500
Less:Decrease in accrued liabilities	($1,900)
Net cash provided/ (used) in operating activities	$136,300
Cash Flows From Investing Activities:
Purchase of plant	($20,700)
Net cash provided/ (used) in investing activities	($20,700)
Cash Flows From Financing Activities:
Issuance of common stock	$23,400
Less: Payment of notes payable	($47,900)
Less: Dividend paid	($80,200)
Net cash provided/ (used) in financing activities	($83,800)
Net increase/(Decrease) in cash	$10,900
Cash Balance, December 31, 2017	$15,400
Cash Balance, December 31, 2018	$26,300

Calculation of value of plant purchase:

The value of the purchase of the plant is determined by taking the opening balance i.e., $108,330 and subtracting the cost of the sold plant i.e., $13,240 then comparing it to the closing balance of the plant i.e., $115,790. Therefore, the difference now will be the purchase of the plant i.e., $20,700.

Evaluation of investment (2):

This problem help in evaluating an investment because it providing information about the cash receipts and cash payments. This indicating that company has enough liquidity to pay their debts