Question

Somerville Corporation began business in January 2017 as a commercial interior designing company. Shares of stock were issued to the owners in exchange for cash. A building was purchased by making a down payment in cash and signing a mortgage payable for the balance. Land was purchased by issuing bonds. Services are performed for local businesses and office buildings on open account, and customers are given 30 days to pay their accounts. The following amounts are from the records of the company at the end of its first month of operations:

Account Name			Balance
Accounts Receivable			24,550
Capital Stock (i.e. Common Stock)			80,000
Cash			55,050
Supplies Inventory			5,000
Prepaid Rent			1,000
Design Revenue			45,900
Dividends			5,500
Land			100,000
Accumulated Depreciation			10,480
Building			262,000
Accounts Payable			5,000
Mortgage Payable			230,000
Salaries Payable			4,500
Income Taxes Payable			6,936
Bonds Payable			100,000
Rent Expense			3,800
Depreciation Expense			10,480
Retained Earnings			?
Income Tax Expense			6,936
Salary and Wage Expense			8,500

Using the data given, prepare a Statement of Cash Flows for 2017 using the indirect method in the Operating Activities section. Use the minus sign to indicate cash payments, cash outflows, or decreases in cash. (3 points)

Answer 1

Statement of Cash Flows of Somerville Corporation for 2017 (using indirect method)

Cash flow from Operating activities:   $

1.Net income (see note 1) 16,184

2.Depreciation expense 10,480

3.Increase in Accounts receivable -24,550

4.Increase in Supplies inventory -5,000

5.Increase in prepaid rent -1,000

6.Increase in Accounts payable 5,000

7.Increase in Salary payable 4,500

8.Increase in Taxes payable 6,936  

Net Cash flow from operation    $12,550

Cash flow from Investing Activities:

Down payment on Purchase of building( see note 2) -32,000

Net Cash flow from Investing Activities   -$32000

Cash Flow from investing Activities:

Proceeds from issue of shares 80,000

Dividend paid     -5,500

Net Cash flow from Financing Activities $74,500  

Cash at the end of period   $57,050    

Note 1:

Somerville Corporation Net income for the year ended 2017

Revenues:

Design revenue $45,900

Less : Expenses:

Rent expense   $3,800

Depreciation expense $10,480

Salary and wages expense $8,500   

Operating income before tax $23,120

less:Income Tax expense $6,936

Net operating income after tax(Net income) $16,184

Note 2:

Cash paid on purchase of building:

Purchase price of building $262,000

less: Payable by mortgage   $230,000

Down payment paid $32,000