Question

American Rare Coins (ARC) was formed on January 1, 2018. Additional data for the year follow:

a. On January 1, 2018, ARC issued no par common stock for \(450,000.

b. Early in January, ARC made the following cash payments:

1. For store fixtures, \)53,000
2. For merchandise inventory, \(340,000
3. For rent expense on a store building, \)20,000

c. Later in the year, ARC purchased merchandise inventory on account for \(239,000. Before year-end, ARC paid \)139,000 of these accounts payable.

d. During 2018, ARC sold 2,400 units of merchandise inventory for \(275 each. Before year-end, the company collected 85% of this amount. Cost of goods sold for the year was \)250,000, and ending merchandise inventory totaled \(329,000.

e. The store employs three people. The combined annual payroll is \)96,000, of which ARC still owes \(3,000 at year-end.

f. At the end of the year, ARC paid income tax of \)17,000. There are no income taxes payable.

g. Late in 2018, ARC paid cash dividends of $44,000.

h. For store fixtures, ARC uses the straight-line depreciation method, over five years, with zero residual value.

Requirements

1. What is the purpose of the statement of cash flows?
2. Prepare ARC’s income statement for the year ended December 31, 2018. Use the single-step format, with all revenues listed together and all expenses listed together.
3. Prepare ARC’s balance sheet at December 31, 2018.

Prepare ARC’s statement of cash flows using the indirect method for the year ended December 31, 2018.

Short answer

1. To know the exact details of the cash inflow and outflow.
2. Net income for the year ended December 31, 2018, is $266,400
3. Total assets are $775,400 and total liabilities and stockholders’ equity are $775,400
4. Net cash flow for the year ended December 31, 2018, is $305,000

Step-by-step solution

The purpose of the statement of cash flows

The cash flow statement is part of the financial statements. It shows the correct picture of the cash flow. It makes it easy for the reader of the financial statements to know how much the company has borrowed the amount or how much it invests. There are several incomes of the company, cash flow statements facilitate the reader to have a knowledge of the fund flow of the company’s primary business other than other incomes of the company.

Income statement for the year ended December 31, 2018

American Rare Coins Income Statement For the year ended December 31, 2018
Revenues
Sales revenue (2,400 x $275)	$660,000
Expenses:
Cost of goods sold	$250,000
Depreciation($53,000 / 5)	$10,600
Other operating expense ($96,000+$20,000)	$116,000
Income tax	$17,000
Net Income	$266,400

Balance sheet at December 31, 2018

American Rare Coins Balance Sheet For the year ended December 31, 2018
Current Assets:
Cash	$305,000
Merchandise Inventory	$329,000
Account Receivables ($660,000 x 15%)	$99,000
Long-term Assets:
Store Fixtures net	$42,400
Total Assets	$775,400
Current Liabilities:
Account payable	$100,000
Accrued liabilities	$3,000
Total Liabilities	$103,000
Stockholder’s Equity
Common stock	$450,000
Retained earnings ($266,400 - $44,000)	$222,400
Total Stockholder’s Equity	$672,400
Total Liabilities and Stockholder’s Equity	$775,400

Statement of cash flows using the indirect method

American Rare Coins Statement of Cash Flows For the year ended December 31, 2018
Cash Flows From Operating Activities:
Net Income	$266,400
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Depreciation expense	$10,600
Increase in account receivables ($660,000 – ($660,000x 85%)	($99,000)
Increase in merchandise inventory ($340,000 -$250,000)	($90,000)
Decrease in account payable($239000-$100,000)	($139,000)
Increase in accrued liabilities ($96,000 -$93,000)	$3,000
Net cash provided/ (used) in operating activities	($48,000)
Cash Flows From Investing Activities:
Purchase of store fixtures	($53,000)
Net cash provided/ (used) in investing activities	($53,000)
Cash Flows From Financing Activities:
Issuance of common stock	$450,000
Dividend paid	($44,000)
Net cash provided/ (used) in financing activities	$406,000
Net change in cash	$305,000