Question

Statement of Cash Flows—Indirect Method

Peoria Corp. just completed another successful year, as indicated by the following income statement:

	For the Year Ended December 31, 2017

Sales revenue	$1,250,000
Cost of goods sold	700,000
Gross profit	$550,000
Operating expenses	150,000
Income before interest and taxes	$400,000
Interest expense	25,000
Income before taxes	$375,000
Income tax expense	150,000
Net income	$225,000

Presented here are comparative balance sheets:

	December 31
	2017		2016
Cash	$52,000		$90,000
Accounts receivable	180,000		130,000
Inventory	230,000		200,000
Prepayments	15,000		25,000
Total current assets	$477,000		$445,000
Land	$750,000		$600,000
Plant and equipment	700,000		500,000
Accumulated depreciation	(250,000)		(200,000)
Total long-term assets	$1,200,000		$900,000
Total assets	$1,677,000		$1,345,000
Accounts payable	$130,000		$148,000
Other accrued liabilities	68,000		63,000
Income taxes payable	90,000		110,000
Total current liabilities	$288,000		$321,000
Long-term bank loan payable	$350,000		$300,000
Common stock	$550,000		$400,000
Retained earnings	489,000		324,000
Total stockholders' equity	$1,039,000		$724,000
Total liabilities and stockholders' equity	$1,677,000		$1,345,000

Other information is as follows:

Dividends of $60,000 were declared and paid during the year.

Operating expenses include $50,000 of depreciation.

Land and plant and equipment were acquired for cash, and additional stock was issued for cash. Cash also was received from additional bank loans.

The president has asked you some questions about the year's results. She is very impressed with the profit margin of 18% (net income divided by sales revenue). She is bothered, however, by the decline in the company's cash balance during the year. One of the conditions of the existing bank loan is that the company maintain a minimum cash balance of $50,000.

Required:

1. 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.

Peoria Corp.
Statement of Cash Flows
For the Year Ended December 31, 2017
Cash Flows from Operating Activities
	$
Adjustments to reconcile net income to net cash provided by operating activities:
	$
Cash Flows from Investing Activities
	$
	$
Cash Flows from Financing Activities
	$
	$
	$
Cash balance, December 31, 2016
Cash balance, December 31, 2017	$

2. During the year Peoria experienced a decrease in cash at the end of the year due to

     

Answer 1

In the current year, cash balance reduced by 38,000 mainly because long term funds were raised only to the extent of USD 140,000 but investment in land and plant was significantly more, i.e. 350,000. Therfore, the difference here was primarily finded by cash flow from operations. Cash flow from operations was also impacted due to tax payments and additional working captal. All these factors cumulatively resulted in the decreased cash balance during the year.

Please comment for anly clarifications