Question

Question:The comparative balance sheets for Hinckley Corporation show the following information.

	December 31
	2017	2016
Cash	\(33,500	\)13,000
Accounts receivable	12,250	10,000
Inventory	12,000	9,000
Available-for-sale debt investment	0	3,000
Building	0	29,750
Equipment	45,000	20,000
Patents	5,000	6,250
	\(107,750	\)91,000
Allowance for doubtful accounts	\(3,000	\)4,500
Accumulated depreciation – equipment	2,000	4,500
Accumulated depreciation – building	0	6,000
Accounts payable	5,000	3,000
Dividend payable	0	5,000
Notes payable, short-term (non-trade)	3,000	4,000
Long-term note payable	31,000	25,000
Common stock	43,000	33,000
Retained earnings	20,750	6,000
	\(107,750	\)91,000

Additional data related to 2017 are as follows.

1. Equipment that had cost $11,000andwas40$2,500.

2. \(10,000 of the long-term note payable was paid by issuing common stock.

3. Cash dividends paid were \)5,000.

4. On January 1, 2017, the building was completely destroyed by a flood. Insurance proceeds on the building were $30,000(netof$2,000 taxes).

5. Investments (available-for-sale) were sold at \(1,700 above their cost. The company has made similar sales and investments in the past.

6. Cash was paid for the acquisition of equipment.

7. A long-term note for \)16,000 was issued for the acquisition of equipment.

8. Interest of $2,000andincometaxesof$6,500 were paid in cash.

Instructions

Prepare a statement of cash flows using the indirect method. Flood damage is unusual and infrequent in that part of the country

Short answer

Answer

Net changes in cash totals$20,500.

Step-by-step solution

Definition of Cash flow Statement

A cash flow statement is a summary of the cash inflows and outflows that occurred during a specific period. This summary of inflows and outflows is prepared in three sections; investing, financing, and operating

Statement of cash flow using the indirect method

Particular	Amount $	Amount $
Net income$\left(\$20,750-\$6,000+\$5,000\right)$		$19,750
Add/Less: Adjustments to net income
Loss on sale	$4,100
Depreciation expenses	1,900
Gains from flood damage	(8,250)	(2,250)
Add/Less: Changes in current assets and liabilities
Increase in accounts receivables net of allowance	(3,750)
Increase in inventory	(3,000)
Increase in account payable	2,000
Gain on sale of investment	(1,700)
Decrease in dividend payable	(5,000)
Patent amortization	1,250
Decrease in short-term notes payable	(1,000)	(11,200)
Cash flow from operations		$6,300
Cash flow from investment
Sales of investment	$4,700
Sale of equipment	2,500
Purchase of equipment	(20,000)
Proceed from flood damage	32,000	19,200
Cash flow from financing activities
Cash dividend paid	(5,000)	(5,000)
Net change in cash		$20,500
Add: opening cash balance		13,000
Ending cash balance		$33,500
Noncash investing and financing activities
Retired notes payable by issuing common stock		$10,000

Working notes:

1. Calculation of gain or loss on sale of equipment:

Particular	Amount $
Cost	$11,000
Less: Accumulated depreciation (40% on $11,000)	(4,400)
Book value	6,600
Less: Sales price	(2,500)
Loss on sale	$4,100

1. Calculation of depreciation expenses on equipment:

Particular	Amount $
Accumulated depreciation on equipment sold	$4,400
Less: Decrease in accumulated depreciation	(2,500)
Depreciation expenses	$1,900

1. Cash paid for the purchase of equipment:

Particular	Amount $
Beginning equipment balance	$20,000
Less: Cost of equipment sold	(11,000)
Remaining balance	$9,000
Purchased equipment with the note	16,000
Adjusted balance	25,000
Ending equipment balance	(45,000)
Equipment purchased for cash	$20,000

1. Calculation of gain from flood damages:

Particular	Amount $
Cash received	$30,000
Add: taxes	2,000
	32,000
Less: Cost of building net of accumulated depreciation$\left(\$29,750-\$6,000\right)$	23,750
Gain	$8,250