Question

Statement of Cash Flows Using a Work Sheet—Indirect Method (Appendix) Wabash Corp. just completed another successful...

  1. Statement of Cash Flows Using a Work Sheet—Indirect Method (Appendix)

    Wabash Corp. just completed another successful year, as indicated by the following income statement:

    For the Year Ended December 31, 2017
    Sales revenue $2,460,000  
    Cost of goods sold 1,400,000  
      Gross profit $1,060,000  
    Operating expenses 460,000  
      Income before interest and taxes $600,000  
    Interest expense 100,000  
      Income before taxes $500,000  
    Income tax expense 150,000  
      Net income $350,000  

    Presented here are comparative balance sheets:

    December 31
    2017 2016
    Cash $140,000 $210,000
    Accounts receivable 60,000 145,000
    Inventory 200,000 180,000
    Prepayments 15,000 25,000
       Total current assets $415,000 $560,000
    Land $600,000 $700,000
    Plant and equipment 850,000 600,000
    Accumulated depreciation (225,000) (200,000)
       Total long-term assets $1,225,000 $1,100,000
       Total assets $1,640,000 $1,660,000
    Accounts payable $140,000 $120,000
    Other accrued liabilities 50,000 55,000
    Income taxes payable 80,000 115,000
       Total current liabilities $270,000 $290,000
    Long-term bank loan payable $200,000 $250,000
    Common stock $450,000 $400,000
    Retained earnings 720,000 720,000
      Total stockholders' equity $1,170,000 $1,120,000
      Total liabilities and stockholders' equity $1,640,000 $1,660,000

    Other information is as follows:

    1. Dividends of $350,000 were declared and paid during the year.
    2. Operating expenses include $25,000 of depreciation.
    3. Land was sold for its book value, and new plant and equipment were acquired for cash.
    4. Part of the bank loan was repaid, and additional common stock was issued for cash.

    The president has asked you some questions about the year's results. She is very impressed with the profit margin of 14% (net income divided by sales revenue). She is bothered, however, by the decline in the company's cash balance during the year. One of the conditions of the existing bank loan is that the company maintain a minimum cash balance of $100,000.

    Required:

    1. Using the format in the chapter's appendix, prepare a statement of cash flows work sheet. If an amount box does not require an entry, leave it blank.

    Balances Cash Inflows (Outflows)
    Accounts 12/31/17 12/31/16 Changes Operating Investing Financing
    Cash
    Accounts Receivable
    Inventory
    Prepayments
    Land
    Plant and Equipment
    Accumulated Depreciation
    Accounts Payable
    Other Accrued Liabilities
    Income Taxes Payable
    Long-Term Bank Loan Payable
    Common Stock
    Retained Earnings
    Net Income
    Totals $ $ $ $ $ $
    Net increase (decrease) in cash $

Homework Answers

Answer #1

1) Statement of cash flow worksheet is shown as follows:-

Balances Cash Inflows (Outflows)
Accounts 12/31/17 (A) 12/31/16 (B) Changes (A-B) Operating Investing Financing
Cash 140,000 210,000 (70,000)
Accounts Receivable 60,000 145,000 (85,000) 85,000
Inventory 200,000 180,000 20,000 (20,000)
Prepayments 15,000 25,000 (10,000) 10,000
Land 600,000 700,000 (100,000) 100,000
Plant and Equipment 850,000 600,000 250,000 (250,000)
Accumulated Depreciation 225,000 200,000 25,000 25,000
Accounts Payable 140,000 120,000 20,000 20,000
Other Accrued Liabilities 50,000 55,000 (5,000) (5,000)
Income Taxes Payable 80,000 115,000 (35,000) (35,000)
Long-Term Bank Loan Payable 200,000 250,000 (50,000) (50,000)
Common Stock 450,000 400,000 50,000 50,000
Retained Earnings 720,000 720,000 0
Net Income (350,000-dividends paid 350,000) 0
Totals 3,730,000 3,720,000 10,000 80,000 (150,000) 0
Net increase (decrease) in cash (70,000)

Notes:-

1) Under indirect method, net income is adjusted for calculating operating cash flows. Increase in current assets and decrease in current liabilities are deducted from net income and decrease in current assets and increase in current liabilities are added to net income. All these are part of operating activities only. Non cash expenses such as depreciation is also added to net income.

2) Net income for the year 2017 is $350,000 and dividends paid in 2017 is also $350,000. Hence net effect on retained earnings is zero.

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