Question

Item 4A.

Krech Corporation's comparative balance sheet appears below:

Comparative Balance Sheet
	Ending Balance			Beginning Balance
Assets:
Current assets:
Cash and cash equivalents	$	31,000		$	28,000
Accounts receivable		18,000			20,000
Inventory		58,000			56,000
Prepaid expenses		12,000			10,000
Total current assets		119,000			114,000
Property, plant, and equipment		374,000			354,000
Less accumulated depreciation		190,000			165,000
Net property, plant, and equipment		184,000			189,000
Total assets	$	303,000		$	303,000
Liabilities and stockholders' equity:
Current liabilities:
Accounts payable	$	13,000		$	9,000
Accrued liabilities		52,000			53,000
Income taxes payable		67,000			69,000
Total current liabilities		132,000			131,000
Bonds payable		76,000			73,000
Total liabilities		208,000			204,000
Stockholders’ equity:
Common stock		28,000			26,000
Retained earnings		67,000			73,000
Total stockholders’ equity		95,000			99,000
Total liabilities and stockholders' equity	$	303,000		$	303,000

The company's net income (loss) for the year was ($3,000) and its cash dividends were $3,000. It did not sell or retire any property, plant, and equipment during the year. The company uses the indirect method to determine the net cash provided by operating activities.

Which of the following is correct regarding the operating activities section of the statement of cash flows?

Multiple Choice

• The change in Accounts Payable will be added to net income; The change in Accrued Liabilities will be subtracted from net income
• The change in Accounts Payable will be subtracted from net income; The change in Accrued Liabilities will be added to net income
• The change in Accounts Payable will be subtracted from net income; The change in Accrued Liabilities will be subtracted from net income
• The change in Accounts Payable will be added to net income; The change in Accrued Liabilities will be added to net income

4B.

Financial statements of Rukavina Corporation follow:

Comparative Balance Sheet
	Ending Balance			Beginning Balance
Assets:
Cash and cash equivalents	$	40		$	37
Accounts receivable		98			88
Inventory		57			47
Property, plant, and equipment		768			640
Less accumulated depreciation		362			315
Total assets	$	601		$	497
Liabilities and stockholders' equity:
Accounts payable	$	80		$	84
Bonds payable		174			270
Common stock		108			88
Retained earnings		239			55
Total liabilities and stockholders' equity	$	601		$	497

Income Statement
Sales	$	785
Cost of goods sold		351
Gross margin		434
Selling and administrative expense		113
Net operating income		321
Income taxes		115
Net income	$	206

Cash dividends were $22. The company did not dispose of any property, plant, and equipment. It did not issue any bonds payable or repurchase any of its own common stock. The following questions pertain to the company's statement of cash flows.

The net cash provided by (used in) investing activities for the year was:

Multiple Choice

• $(128)
• $128
• $(22)
• $22

Answer 1

Solution 4A:

Change in account Payable = $13000 - $9000 = $4000 Increase

Change in Accrued Liabilities = $52000 - $53000= $1000 decrease

Since there is Increase in Accounts payable, It will be added to the net income and since there is decrease in Accrues liabilities, it will be substracted from net income.

Hence first option is correct.

Solution 4B:

Net Cash provided (used in) investing Activities = Purchase of Property, Plant and Equipment

= $640- $768 = -$128 (i.e. Net cash used in Investment Activities)

Hence first option is correct.