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 |
||||
| 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}} | ||
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.