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Broussard Company reported net income of \(3.5 million in 2017. Depreciation for the year was \)520,000, accounts receivable increased \(500,000, and accounts payable increased \)300,000. Compute net cash flow from operating activities using the indirect method.

Short Answer

Expert verified

Net cash flow from operating activities is $3,820,000.

Step by step solution

01

Meaning of Operating activities.

Cash flows are categorized as operating exercises within the statement of cash flows. The foremost revenue-generating activities of trade are those categorised under this heading; in this manner, cash flows are typically connected to revenues and expenses.

02

Computing net cash flow from operating activities.

$3,820,000 in net cash flow was generated by operating activities. The answer, using the indirect approach, is:

Net income

$3,500,000

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation expense $ 520,000

Accounts receivable increase (500,000)

Accounts payable increase 300,000

320,000

Net cash provided by operating activities

$3,820,000

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Most popular questions from this chapter

Question: (L01,4) (Classification of Transactions) Following are selected balance sheet accounts of Allman Bros. Corp. at December 31, 2017 and 2016, and the increases or decreases in each account from 2016 to 2017. Also presented is selected income statement information for the year ended December 31, 2017, and additional information.

2017

2016

Increase (Decrease)

Selected balance sheet accounts

Assets

Accounts receivables

\(34,000

\)24,000

\(10,000

Property, plant and equipment

277,000

247,000

30,000

Accumulated depreciation โ€“ plant assets

(178,000)

(167,000)

(11,000)

Liabilities and stockholderโ€™s equity

Bonds payable

\)49,000

\(46,000

\)3,000

Dividend payable

8,000

5,000

3,000

Common stock, \(1 par

22,000

19,000

3,000

Additional paid-in-capital

9,000

3,000

6,000

Retained earnings

104,000

91,000

13,000

Selected income statement information for the year ended December 31, 2017:

Sales revenue

\)155,000

Depreciation

33,000

Gain on sale of equipment

14,500

Net income

31,000

Additional information:

1. During 2017, equipment costing \(45,000 was sold for cash.

2. Accounts receivable relate to sales of merchandise.

3. During 2017, \)20,000 of bonds payable were issued in exchange for property, plant, and equipment. There was no amortization of bond discount or premium.

Instructions

Determine the category (operating, investing, or financing) and the amount that should be reported in the statement of cash flows for the following items.

(a) Payments for purchase of property, plant, and equipment.

(b) Proceeds from the sale of equipment.

(c) Cash dividends paid.

(d) Redemption of bonds payable.

Accounting, Analysis, and Principles The income statement for the year ended December 31, 2017, for Laskowski Manufacturing Company contains the following condensed information.

LASKOWSKI CO.

INCOME STATEMENT


Revenues

\(6,583,000

Operating expenses (excluding depreciation) \)4,920,000

Depreciation expense 880,000

5,800,000

Income before income tax

783,000

Income tax expense

353,000

Net income

\( 430,000

Included in operating expenses is a \)24,000 loss resulting from the sale of machinery for \(270,000 cash. The company purchased machinery at the cost of \)750,000.

Laskowski reports the following balances on its comparative balance sheets on December 31.


LASKOWSKI CO.

COMPARATIVE BALANCE SHEETS (PARTIAL)

2017

2016

Cash

\(672,000

\)130,000

Accounts receivable

775,000

610,000

Inventory

834,000

867,000

Accounts payable

521,000

501,000

Income tax expense of \(353,000 represents the amount paid in 2017. Dividends declared and paid in 2017 totalled \)200,000.

Accounting

Prepare the statement of cash flows using the indirect method.

Analysis

Laskowski has an aggressive growth plan, which will require significant investments in plant and equipment over the next several years. Preliminary plans call for an investment of over $500,000 in the next year. Compute Laskowskiโ€™s free cash flow (from Chapter 5) and use it to evaluate the investment plans with the use of only internally generated funds.

Principles

How does the statement of cash flows contribute to achieving the objective of financial reporting?

The following data are taken from the records of Alee Company

December 31, December 31,

2017 2016

Cash \( 15,000 \) 8,000

Current assets other than cash 85,000 60,000

Long-term debt investments 10,000 53,000

Plant assets 335,000 215,000

\(445,000 \)336,000

December 31, December 31,

2017 2016

Accumulated depreciation \( 20,000 \) 40,000

Current liabilities 40,000 22,000

Bonds payable 75,000 โ€“0โ€“

Common stock 254,000 254,000

Retained earnings 56,000 20,000

\(445,000 \)336,000

Additional information:

1. Held-to-maturity securities carried at a cost of \(43,000 on December 31, 2016, were sold in 2017 for \)34,000. The loss (not unusual) was incorrectly charged directly to Retained Earnings.

2. Plant assets that cost \(50,000 and were 80% depreciated were sold during 2017 for \)8,000. The loss was incorrectly charged directly to Retained Earnings.

3. Net income as reported on the income statement for the year was \(57,000.

4. Dividends paid amounted to \)10,000.

5. Depreciation charged for the year was $20,000.

Instructions

Prepare a statement of cash flows for the year 2017 using the indirect method

Question: (Analysis of Improper SCF) The following statement was prepared by Maloney Corporationโ€™s accountant.


MALONEY CORPORATION

STATEMENT OF SOURCES AND APPLICATION OF CASH

FOR THE YEAR ENDED SEPTEMBER 30, 2017

Sources of cash

Net income

\(111,000

Depreciation and depletion

70,000

Increase in long-term debt

179,000

Changes in current receivables and inventories, less current liabilities (excluding current maturities of long-term debt)

14,000

\)374,000

Application of cash

Cash dividend

\(60,000

Expenditure for property, plant, and equipment

214,000

Investments and other uses

20,000

Change in cash

80,000

\)374,000

The following additional information relating to Maloney Corporation is available for the year ended September 30, 2017.

  1. Salaries and wages expense attributable to stock option plans was \(25,000 for the year.
  2. Net expenditure:

Expenditures for property, plant, and equipment

\)250,000

Proceeds from retirements of property, plant, and equipment

36,000

Net expenditures

\(214,000

  1. A stock dividend of 10,000 shares of Maloney Corporation common stock was distributed to common stockholders on April 1, 2017, when the per share market price was \)7 and par value was \(1.
  2. On July 1, 2017, when its market price was \)6 per share, 16,000 shares of Maloney Corporation common stock were issued in exchange for 4,000 shares of preferred stock.
  3. Depreciation expenses:

Depreciation expenses

\(65,000

Depletion expenses

5,000

\)70,000

  1. Net increase:

Increase in long-term debt

\(620,000

Less: Redemption of debt

441,000

Net increases

\)179,000

Instructions

(a) In general, what are the objectives of a statement of the type shown above for Maloney Corporation? Explain.

(b) Identify the weaknesses in the form and format of Maloney Corporationโ€™s statement of cash flows without reference to the additional information. (Assume adoption of the indirect method.)

(c) For each of the six items of additional information for the statement of cash flows, indicate the preferable treatment and explain why the suggested treatment is preferable.

Question: (SCFโ€”Indirect Method) Condensed financial data of Pat Metheny Company for 2017 and 2016 are presented below.

PAT METHENY COMPANY

COMPARATIVE BALANCE SHEET

AS OF DECEMBER 31, 2017 AND 2016


2017

2016

Cash

\(1,800

\)1,150

Receivables

1,750

1,300

Inventory

1,600

1,900

Plant assets

1,900

1,700

Accumulated depreciation

(1,200)

(1,170)

Long-term-investment (Held to maturity)

1,300

1,420

\(7,150

\)6,300

Account payable

\(1,200

\)900

Accrued liabilities

200

250

Bond payable

1,400

1,550

Common stock

1,900

1,700

Retained earnings

2,450

1,900

\(7,150

\)6,300

PAT METHENY COMPANY

INCOME STATEMENT

FOR THE YEAR ENDED DECEMBER 31, 2017

Sales

\(6,900

Cost of goods sold

(4,700)

Gross margin

2,200

Selling and administrative expenses

930

Income from operations

1,270

Other revenue and gains

Gains on sale of investment

80

Income before tax

1,350

Income tax expenses

540

Net income

810

Cash dividend

260

Income retained in business

\)550

Additional information:

During the year, $70 of common stock was issued in exchange for plant assets. No plant assets were sold in 2017.

Instructions

Prepare a statement of cash flows using the indirect method.

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