Question

Question:Comparative balance sheet accounts of Marcus Inc. are presented below.

MARCUS INC.

COMPARATIVE BALANCE SHEET ACCOUNTS

AS OF DECEMBER 31, 2017 AND 2016

December 31

2017 2016

Debit Accounts

Cash \( 42,000 \) 33,750

Accounts Receivable 70,500 60,000

Inventory 30,000 24,000

Equity investments 22,250 38,500

Machinery 30,000 18,750

Buildings 67,500 56,250

Land 7,500 7,500

\(269,750 \)238,750

Credit Accounts

Allowance for Doubtful Accounts \( 2,250 \) 1,500

Accumulated Depreciation—Machinery 5,625 2,250

Accumulated Depreciation—Buildings 13,500 9,000

Accounts Payable 35,000 24,750

Accrued Payables 3,375 2,625

Long-Term Notes Payable 21,000 31,000

Common Stock, no-par 150,000 125,000

Retained Earnings 39,000 42,625

\(269,750 \)238,750

Additional data (ignoring taxes):

1. Net income for the year was \(42,500.

2. Cash dividends declared and paid during the year were \)21,125.

3. A 20% stock dividend was declared during the year. \(25,000 of retained earnings was capitalized.

4. Equity investments (level of ownership is less than 20%) that cost \)25,000 were sold during the year for \(28,750. No unrealized gains and losses were recorded on these investments in 2017.

5. Machinery that cost \)3,750, on which \(750 of depreciation had accumulated, was sold for \)2,200. Marcus’s 2017 income statement follows (ignoring taxes).

Sales revenue \(540,000

Less: Cost of goods sold 380,000

Gross margin 160,000

Less: Operating expenses (includes \)8,625 depreciation and \(5,400 bad debts) 120,450

Income from operations 39,550

Other: Gain on sale of investments \)3,750

Loss on sale of machinery (800) 2,950

Net income $ 42,500

Instructions

1. Compute net cash flow from operating activities using the direct method.

(b) Prepare a statement of cash flows using the indirect method.

Short answer

Answer

1. Cash flow from operating activities using the direct method is computed as $43,425
2. The required statement of cash flow is prepared using the indirect method, and the net increase in cash is $8,250

Step-by-step solution

Meaning of Cash Flow from Investing Activities

Cash flow from investing activities refers to those activities that include the cash inflow and outflow related to the sale and purchase of non-current assets and long-term investments.

Computation of cash flows from operating activities using the direct method

Marcus Inc
Statement of cash flows
For the year ended December 31, 2017
	Amount ($)	Amount ($)
Cash flows from operating activities
Cash received from customers (540,000 – 10,500 – 4,650)		524,850
Cash Payments:
To Suppliers (380,000 + 6,000 – 10,250)	375,750
For operating expenses (120,450 – 8,625 – 750)	105,675	481,425
Net cash provided by operating activities		43,425

Preparation of the statement of cash flows using the indirect method

Marcus Inc.
Statement of cash flows
For the year ended December 31, 2017
Cash flows from operating activities	Amount ($)	Amount ($)
Net Income		42,500
Adjustment to reconcile net income to net cash provided by operating activities:
Depreciation expense	8,625
Gain on sale of investments	(3,750)
Loss on sale of machinery	800
Increase in accounts receivables (net)	(9,750)
Increase in inventory	(6,000)
Increase in accounts payable	10,250
Increase in accrued payable	750	925
Net cash provided by operating activities		43,425
Cash flows from Investing activities
Purchase of investments [22,250-(38,500-25,000)]	(8,750)
Purchase of machinery [30,000-(18,750-3,750)]	(15,000)
Sale of investment	28,750
Sale of equipment	2,200
Addition to buildings	(11,250)
Net cash provided by investing activities		(4,050)
Cash flows from financing activities
Payments of long-term notes payable	(10,000)
Cash dividends paid	(21,125)
Net cash used by financing activities		(31,125)
Net Increase in cash		8,250
Cash, January 1, 2017		33,750
Cash, December 31, 2017		42,000