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Question: Michaels Company had available at the end of 2017 the following information.

MICHAELS COMPANY COMPARATIVE

BALANCE SHEETS

AS OF DECEMBER 31, 2017 AND 2016


2017

2016

Cash

\(10,000

\)4,000

Accounts receivable

20,500

12,950

Short-term investments

22,000

30,000

Inventory

42,000

35,000

Prepaid rent

3,000

12,000

Prepaid insurance

2,100

900

Supplies

1,000

750

Land

125,000

175,000

Building

350,000

350,000

Accumulated depreciation – building

(105,000)

(87,500)

Equipment

525,000

400,000

Accumulated depreciation – equipment

(130,000)

(112,000)

Patents

45,000

50,000

Total assets

\(910,600

\)871,100

Account payable

\(22,000

\)32,000

Income tax payable

5,000

4,000

Salaries and wages payable

5,000

3,000

Short-term note payable

10,000

10,000

Long-term note payable

60,000

70,000

Bond payable

400,000

400,000

Premium on bond payable

20,303

25,853

Common stock

240,000

220,000

Paid-in-capital in excess of par – common stock

25,000

17,500

Retained earnings

123,297

88,747

Total liabilities and stockholders equity

\(910,600

\)871,100

MICHAELS COMPANY

INCOME STATEMENT AND DIVIDEND INFORMATION

FOR THE YEAR ENDED DECEMBER 31, 2017


Sales revenue

\(1,160,000

Cost of goods sold

748,000

Gross margin

412,000

Operating expenses

Selling expenses

\)79,200

Administrative expenses

156,700

Depreciation/Amortization expenses

40,500

Total operating expenses

276,400

Income from operations

135,600

Other revenue/expenses

Gain on sale of land

8,000

Gain on sale of short-term investment

4,000

Dividend revenue

2,400

Interest expenses

(51,750)

(37,350)

Income before tax

98,250

Income tax expenses

39,400

Net income

58,850

Dividend to common stockholders

(24,300)

To Retained earnings

$34,550

Instructions

Prepare a statement of cash flows for Michaels Company using the direct method accompanied by a reconciliation schedule. Assume the short-term investments are debt securities, classified as available-for-sale

Short Answer

Expert verified

Answer

Net changes in cash totals$6,000.

Step by step solution

01

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.

02

Statement of cash flow using the direct method

Particular

Amount $

Amount $

Cash from customer

$1,152,450

Dividend income

2,400

Cash paid:

Suppliers

$765,000

Operating expenses

226,350

Taxes

38,400

Interest

57,300

(1,087,050)

Net cash provided by operating activities

$67,800

Cash flow from investing activities

Sale of short-term investment$8,000+$4,000

$12,000

Sale of land($50,000+$8,000)

58,000

Purchase equipment

(125,000)

Net cash used by investing activities

($55,000)

Cash flow from financing activities

Proceed from issuance of common stock($20,000+$7,500)

27,500

Principal payment of long-term debt

(10,000)

Dividend payment

(24,300)

Cash used in financing activities

($6,800)

Net changes in cash

$6,000

Add: Opening cash balance

4,000

Ending cash balance

$10,000

Working note:

  1. Cash received from customers

Particular

Amount $

Sales revenue

$1,160,000

Less: Increase in accounts receivables($20,000+$12,950)

(7,550)

Cash received from customer

$1,152,450

  1. Cash paid to suppliers:

Particular

Amount $

Cost of goods sold

$748,000

Add: Increase in inventory ($42,000+$35,000)

7,000

Add: Decrease in accounts payable($32,000+$22,000)

10,000

Cash received from customer

$765,000

  1. Calculation of cash paid for operating expenses:

Particular

Amount $

Operating expenses

$276,400

Less: depreciation/amortization expenses

(40,500)

Less: Decrease in prepaid rent

(9,000)

Less: Increase in salaries and wages payable

(2,000)

Add: Increase in supplies

250

Add: Increase in prepaid insurance

1,200

Cash paid for operating expenses

$226,350

  1. Calculation of cash paid for taxes:

Particular

Amount $

Income tax expenses

$39,400

Less: Increase in income tax payable($5,000+$4,000)

1,000

Cash paid for taxes

$38,400

  1. Calculation of cash paid for interest:

Particular

Amount $

Interest expenses

$51,750

Add: decrease in premium on bond payable($25,853+$20,303)

5,550

Cash paid for taxes

$57,300

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Most popular questions from this chapter

Question: The board of directors of Tirico Corp. declared cash dividends of \(260,000 during the current year. If dividends payable was \)85,000 at the beginning of the year and $90,000 at the end of the year, how much cash was paid in dividends during the year?

Under IFRS, significant non-cash transactions:

  1. are classified as operating, if they are related to income items.
  2. are excluded from the statement of cash flows and disclosed in a narrative form or summarized in a separate schedule.
  3. are classified as an investing or financing activity.
  4. are classified as an operating activity, unless they can be specifically identified with financing or investing activities.

Differentiate between the direct method and the indirect method by discussing each method

Indicate in general journal form how the items below would be entered in a worksheet for the preparation of the statement of cash flows.

(a) Net income is \(317,000.

(b) Cash dividends declared and paid totaled \)120,000.

(c) Equipment was purchased for \(114,000.

(d) Equipment that originally cost \)40,000 and had accumulated depreciation of \(32,000 was sold for \)10,000.

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 –0–

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

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