Question

Financial statements for Discovery Company follow:

DISCOVERY COMPANY
Statement of Financial Position
As of 31 December		20X4				20X3
Assets
Current assets:
Cash		$	28,000			$	24,400
Accounts receivable			779,500				747,200
Inventory			635,900				580,800
Total current assets			1,443,400				1,352,400
Land			529,900				228,800
Plant and equipment			2,664,700				1,844,100
Less: Accumulated depreciation			(1,357,700	)			(1,339,200	)
Patents			140,800				148,000
Total assets		$	3,421,100			$	2,234,100
Liabilities and shareholders’ equity
Liabilities:
Current liabilities:
Accounts payable		$	439,000			$	482,400
Salaries and wages payable			69,200				64,100
Income tax payable			161,900				151,100
Total current liabilities			670,100				697,600
Long-term debt			1,679,200				907,100
Total liabilities			2,349,300				1,604,700
Shareholders’ equity:
Common shares, no-par			277,100				274,500
Retained earnings			794,700				354,900
Total shareholders’ equity			1,071,800				629,400
Total liabilities and shareholders’ equity		$	3,421,100			$	2,234,100

   

DISCOVERY COMPANY
Statement of Comprehensive Income
For the year ended 31 December 20X4
Sales revenue							5,641,500
Less expenses:
Cost of goods sold		$	3,112,000
Selling and administrative expenses			830,900
Depreciation and amortization			282,100
Rent expense			22,900
Miscellaneous expenses			216,800
Total expenses							4,464,700
Other revenues and expenses:
Interest expense			52,800
Gain on sale of equipment			(9,200	)
Loss on debt retirement			16,900				60,500
Earnings before income tax							1,116,300
Income tax expense							475,100
Net earnings and comprehensive income						$	641,200

   

Additional information:

1. The company sold equipment that had an original cost of $445,200 and a net book value of $188,800. Other equipment was purchased for cash. Patent amortization was $6,000.
2. Long-term debt with a face value of $600,000 was repaid during the year and other long-term debt was issued at a lower interest rate.
3. The company issued shares for land during the period. Other common shares were retired (bought back and cancelled) at book value.
4. Assume unexplained changes in accounts stem from logical transactions.

Required:

1. Prepare the SCF, using the indirect method. Use the two-step method for operations. (Deductible amounts and Cash outflows should be indicated with minus sign.)

2. Prepare the SCF, using the direct method to present cash flows in the operating activities section. (Deductible amounts and Cash outflows should be indicated with minus sign.)

Answer 1

1.

DISCOVERY COMPANY
Statement of Cash flows
For the Year Ended December 31, 20X4
Cash flows from operating activities
Net Income		$        641,200
Adjustments to reconcile net income to ;
Depreciation and amortization expense	$        282,100
Gain on sale of equipment	$          (9,200)
Loss on debt retirement	$          16,900
Changes in current assets and current liabilities
Increase in accounts receivable	$        (32,300)
Increase in inventory	$        (55,100)
Decrease in accounts payable	$        (43,400)
Increase in salaries and wages payable	$             5,100
Increase in income tax payable	$          10,800
		$        174,900
Net cash provided by operating activities		$        816,100
Cash flows from investing activities
Cash received from sale of equipment	$        198,000		168800+9200
Cash paid to purchase of equipment	$ (1,265,800)		1844100-2664700-445200
Net cash used by investing activities		$ (1,067,800)
Cash flows from financing activities
Payment of long term debt	$      (616,900)		600000-16900
Payment of dividends	$      (201,400)		794700-354900-641200
Cash received from long term debt	$    1,372,100		1679200-907100+600000
Cash paid for repurchase of common stock	$      (298,500)		277100-274500-(529900-228800)
Net cash provided by financing activities		$        255,300
Net Increase in cash		$             3,600
Cash and cash equivalents at beginning of period		$          24,400
Cash and cash equivalents at end of period		$          28,000

2.

DISCOVERY COMPANY
Statement of Cash flows
For the Year Ended December 31, 20X4
Cash flows from operating activities
Cash received from customers	$    5,609,200		5641500+747200-779500
Cash paid to suppliers	$ (3,210,500)		3112000+482400-439000+635900-580800
Cash paid for selling and administrative expenses	$      (825,800)		830900+64100-69200
Cash paid for rent expense	$        (22,900)
Cash paid for misc. expenses	$      (216,800)
Cash paid for interest expenses	$        (52,800)
Cash paid for income tax expense	$      (464,300)		475100+151100-161900
Net cash provided by operating activities		$        816,100
Cash flows from investing activities
Cash received from sale of equipment	$        198,000		168800+9200
Cash paid to purchase of equipment	$ (1,265,800)		1844100-2664700-445200
Net cash used by investing activities		$ (1,067,800)
Cash flows from financing activities
Payment of long term debt	$      (616,900)		600000-16900
Payment of dividends	$      (201,400)		794700-354900-641200
Cash received from long term debt	$    1,372,100		1679200-907100+600000
Cash paid for repurchase of common stock	$      (298,500)		277100-274500-(529900-228800)
Net cash provided by financing activities		$        255,300
Net Increase in cash		$             3,600
Cash and cash equivalents at beginning of period		$          24,400
Cash and cash equivalents at end of period		$          28,000

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