Question

Forten Company, a merchandiser, recently completed its calendar-year 2016 operations. For the year, (1) all sales are credit sales, (2) all credits to Accounts Receivable reflect cash receipts from customers, (3) all purchases of inventory are on credit, (4) all debits to Accounts Payable reflect cash payments for inventory, and (5) Other Expenses are paid in advance and are initially debited to Prepaid Expenses. The company’s income statement and balance sheets follow. FORTEN COMPANY Comparative Balance Sheets December 31, 2016 and 2015 2016 2015 Assets Cash $ 43,649 $ 62,500 Accounts receivable 65,825 51,625 Inventory 274,156 249,800 Prepaid expenses 1,220 1,625 Total current assets 384,850 365,550 Equipment 143,025 101,000 Accum. depreciation—Equipment (33,850 ) (41,000 ) Total assets $ 494,025 $ 425,550 Liabilities and Equity Accounts payable $ 59,975 $ 108,350 Short-term notes payable 6,200 4,100 Total current liabilities 66,175 112,450 Long-term notes payable 37,625 33,500 Total liabilities 103,800 145,950 Equity Common stock, $5 par value 153,250 145,250 Paid-in capital in excess of par, common stock 24,000 0 Retained earnings 212,975 134,350 Total liabilities and equity $ 494,025 $ 425,550 FORTEN COMPANY Income Statement For Year Ended December 31, 2016 Sales $ 587,500 Cost of goods sold 287,000 Gross profit 300,500 Operating expenses Depreciation expense $ 18,100 Other expenses 128,100 146,200 Other gains (losses) Loss on sale of equipment (4,025) Income before taxes 150,275 Income taxes expense 26,250 Net income $ 124,025

Additional Information on Year 2016 Transactions The loss on the cash sale of equipment was $4,025 (details in b). Sold equipment costing $43,425, with accumulated depreciation of $25,250, for $14,150 cash. Purchased equipment costing $85,450 by paying $41,000 cash and signing a long-term note payable for the balance. Borrowed $2,100 cash by signing a short-term note payable. Paid $40,325 cash to reduce the long-term notes payable. Issued 1,600 shares of common stock for $20 cash per share. Declared and paid cash dividends of $45,400. Required: 1. Prepare a complete statement of cash flows; report its operating activities using the indirect method. (Amounts to be deducted should be indicated with a minus sign.)

Answer 1

FORTEN COMPANY
Statement of Cash Flows (Indirect Method)
For the Year ended Dec 31, 2016
Cash Flow from opearating activities:
Net Income		124,025
Add/(Less) non cash effects on operating activities
Depreciation expense	18,100
Loss on Sale of Equipment	4,025
Increase in Accounts Receivables	(14,200)
Increase in Inventory	(24,356)
Decrease in Prepaid Expenses	405
Decrease in Accounts Payables	(48,375)	(64,401)
Net Cash provided by operating activities		59,624
Cash flow from Investing Activities
Purchase of Equipment	(41,000)
Sale of Equipment	14,150
Net Cash used by Investing activities		(26,850)
Cash Flow from Financing Activities
Issue of Notes Payable - short term	2,100
Payment of Note Payable - Long term	(40,325)
Issue of Common stock (1,600 shares X $20)	32,000
Cash dividend paid	(45,400)
Net Cash used by Financing activities		(51,625)
Net Increase / (Decrease) in Cash		(18,851)
Cash balance at the beginning - Dec 31, 2015		62,500
Cash balance at the end - Dec 31, 2016		43,649

Equipment Account
Particulars	Amt	Particulars	Amt
To Balance B/f	101,000	By Cash	14,150
		By Accumulated Dep.	25,250
To Cash	41,000	By Loss on sales of equip.	4,025
To Note Payable - Loang term	44,450	By Balance C/f	143,025
	186,450		186,450
Accumulated Dep.
Particulars	Amt	Particulars	Amt
To Plant & Equipment (Bal. Fig)	25,250	By Balance b/f	41,000
To Balance C/f	33,850	By Dep. Exp.	18,100
	59,100		59,100