# Question 16.IP: The comparative balance sheet of Dowling Company for Decembe......

The comparative balance sheet of Dowling Company for December 31, 2012 and 2011, is as follows:

The income statement for Dowling Company is shown here.

Dowling Company
Income Statement
For the Year Ended December 31, 2012

Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                   $1,100,000 Cost of merchandise sold . . . . . . . . . . . . . . . . . . . . . $\underline{710,000}$ Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 390,000
Operating expenses:
Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . .  $23,500 Patent amortization . . . . . . . . . . . . . . . . . . . . . . . . . . 7,000 Other operating expenses . . . . . . . . . . . . . . . . . . . . $\underline{196,000}$ Total operating expenses . . . . . . . . . . . . . . . . . . . . . $\underline{226,500}$ Income from operations . . . . . . . . . . . . . . . . . . . . .$ 163,500
Other income:
Gain on sale of investments. . . . . . . . . . . . . . . . . . .   $11,000 Other expense: Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $\underline{26,000}$ $\underline{(15,000)}$ Income before income tax . . . . . . . . . . . . . . . . . . .$ 148,500
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . .                             $\underline{50,000}$
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                            $\underline{\underline{\ 98,500}}$

An examination of the accounting records revealed the following additional information applicable to 2012:

a.   Land costing $15,000 was sold for$15,000.
b.  A mortgage note was issued for $40,000. c. A building costing$115,000 was constructed.
d.  2,500 shares of common stock were issued at $40 in exchange for the bonds payable. e. Cash dividends declared were$74,670.

Instructions

1. Prepare a statement of cash flows, using the indirect method of reporting cash flows from operating activities.

2. Prepare a statement of cash flows, using the direct method of reporting cash flows from operating activities.

 Dowling Company Comparative Balance Sheet December 31, 2012 and 2011 2012 2011 Assets Cash $140,350$95,900 Accounts receivable (net) 95,300 102,300 Inventories 165,200 157,900 Prepaid expenses 6,240 5,860 Investments (long-term) 35,700 84,700 Land 75,000 90,000 Buildings 375,000 260,000 Accumulated depreciation—buildings (71,300) (58,300) Machinery and equipment 428,300 428,300 Accumulated depreciation—machinery and equipment (148,500) (138,000) Patents $\underline{58,000}$ $\underline{65,000}$ Total assets $\underline{\underline{\ 1,159,290}}$ $\underline{\underline{\ 1,093,660}}$ Liabilities and Stockholders’ Equity Accounts payable (merchandise creditors) $43,500$46,700 Accrued expenses payable (operating expenses) 14,000 12,500 Income taxes payable 7,900 8,400 Dividends payable 14,000 10,000 Mortgage note payable, due 2023 40,000 0 Bonds payable 150,000 250,000 Common stock, $30 par 450,000 375,000 Excess of issue price over par—common stock 66,250 41,250 Retained earnings $\underline{373,640}$ $\underline{349,810}$ Total liabilities and stockholders’ equity $\underline{\underline{\ 1,159,290}}$ $\underline{\underline{\ 1,093,660}}$ Step-by-Step The 'Blue Check Mark' means that this solution was answered by an expert. Learn more on how do we answer questions. 1. Dowling Company Statement of Cash Flows—Indirect Method For the Year Ended December 31, 2012 Cash flows from operating activities: Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 98,500
Adjustments to reconcile net income to net
cash flow from operating activities:
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                  23,500
Amortization of patents. . . . . . . . . . . . . . . . . . . . . . .                   7,000
Gain on sale of investments . . . . . . . . . . . . . . . . . .                  (11,000)
Changes in current operating assets and

liabilities:
Decrease in accounts receivable . . . . . . . .                    7,000
Increase in inventories . . . . . . . . . . . . . . . . . .                  (7,300)
Increase in prepaid expenses . . . . . . . . . . . .                   (380)
Decrease in accounts payable. . . . . . . . . . . .                (3,200)
Increase in accrued expenses payable . . .                   1,500
Decrease in income taxes payable . . . . . . .                   $\underline{(500)}$

Net cash flow from operating activities . . . . . . . .                                 $115,120 Cash flows from investing activities: Cash received from sale of: Investments. . . . . . . . . . . . . . . . . . . . . . . . .$60,000¹
Land. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     $\underline{15,000}$    $75,000 Less: Cash paid for construction of building . . . $\underline{115,000}$ Net cash flow used for investing activities. . . . . (40,000) Cash flows from financing activities: Cash received from issuing mortgage note payable. .$ 40,000
Less: Cash paid for dividends. . . . . . . . . . . . . . . . . . . . . . . . .   $\underline{70,670}$²
Net cash flow used for financing activities . . . . . . . . . . . .                   $\underline{(30,670)}$
Increase in cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                   $44,450 Cash at the beginning of the year. . . . . . . . . . . . . . . . . . . . . $\underline{95,900}$ Cash at the end of the year. . . . . . . . . . . . . . . . . . . . . . . . . . . . $\underline{\underline{\ 140,350}}$ Schedule of Noncash Investing and Financing Activities: Issued common stock to retire bonds payable . . . . . . . . . .$100,000
¹  $60,000 =$11,000 gain + $49,000 (decrease in investments) ²$70,670 = $74,670 –$4,000 (increase in dividends)

2.

Dowling Company
Statement of Cash Flows—Direct Method
For the Year Ended December 31, 2012

Cash flows from operating activities:
Cash received from customers¹. . . . . . . . . . . . . . . . .                      $1,107,000 Deduct: Cash paid for merchandise² . . . . . . . . . . . .$720,500

Cash paid for operating expenses³. . . . . . . . .   194,880
Cash paid for interest expense . . . . . . . . . . . .     26,000
Cash paid for income tax$^{4}$ . . . . . . . . . . . . . . . . .   $\underline{50,500}$     $\underline{991,880}$

Net cash flow from operating activities . . . . . . . .                                       $115,120 Cash flows from investing activities: Cash received from sale of: Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 60,000$^{5}$
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  $\underline{15,000}$   $75,000 Less: Cash paid for construction of building . . . . . . $\underline{115,000}$ Net cash flow used for investing activities. . . . . . . . (40,000) Cash flows from financing activities: Cash received from issuing mortgage note payable. .$ 40,000
Less: Cash paid for dividends$^{6}$ . . . . . . . . . . . . . . . . . . .                  $\underline{70,670}$
Net cash flow used for financing activities . . . . . . .                                $\underline{(30,670)}$
Increase in cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                                 $44,450 Cash at the beginning of the year. . . . . . . . . . . . . . . . $\underline{95,900}$ Cash at the end of the year. . . . . . . . . . . . . . . . . . . . . . . $\underline{\underline{\ 140,350}}$ Schedule of Noncash Investing and Financing Activities: Issued common stock to retire bonds payable . . .$100,000

Schedule Reconciling Net Income with Cash Flows
from Operating Activities$^{7}$

Computations:

¹ $1,100,000 +$7,000 = $1,107,000 ²$710,000 + $3,200 +$7,300 = $720,500 ³$196,000 + $380 –$1,500 = $194,880 $^{4}$$50,000 + $500 =$50,500

$^{5}$ $60,000 =$11,000 gain + $49,000 (decrease in investments) $^{6}$$74,670 + $10,000 –$14,000 = $70,670 $^{7}$ The content of this schedule is the same as the Operating Activities section of part (1) of this solution and is not reproduced here for the sake of brevity. ## Related Answered Questions Question: 16.1 ## Classifying Cash Flows Identify whether each of the following would be reported as an operating, investing, or financing activity in the statement of cash flows. a. Purchase of patent d. Cash sales b. Payment of cash dividend e. Purchase of treasury stock c. Disposal of equipment f. Payment of wages ... ## Verified Answer: a. Investing d. Operating b. Fina... Question: 16.2 ## Adjustments to Net Income—Indirect Method Omni Corporation’s accumulated depreciation increased by$12,000, while $3,400 of patents were amortized between balance sheet dates. There were no purchases or sales of depreciable or intangible assets during the year. In addition, the income statement ... ## Verified Answer: Net income . . . . . . . . . . . . . . . . . . . .... Question: 16.4 ## Cash Flows from Operating Activities—Indirect Method Omicron Inc. reported the following data: Net income$120,000 Depreciation expense 12,000 Loss on disposal of equipment 15,000 Increase in accounts receivable 5,000 Decrease in accounts payable 2,000 Prepare the Cash Flows from Operating ...

Cash flows from operating activities: Net income ....
Question: 16.5

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Cost of merchandise sold. . . . . . . . . . . . . ...
Question: 16.3

## Changes in Current Operating Assets and Liabilities—Indirect Method Victor Corporation’s current operating assets and liabilities from the company’s comparative balance sheet were as follows: ...

a.   ¹   $120,000 × 75% ²$80,000 × 75% b. The c...