Question

Forten Company, a merchandiser, recently completed its calendar-year 2017 operations. For the year, (1) all sales are credit sales, (2) all credits to Accounts Receivable reflect cash receipts from customers, (3) all purchases of inventory are on credit, (4) all debits to Accounts Payable reflect cash payments for inventory, and (5) Other Expenses are paid in advance and are initially debited to Prepaid Expenses. The company’s income statement and balance sheets follow.

FORTEN COMPANY Comparative Balance Sheets December 31, 2017 and 2016
	2017				2016
Assets
Cash	$	72,400			$	88,500
Accounts receivable		88,420				65,625
Inventory		298,156				266,800
Prepaid expenses		1,360				2,195
Total current assets		460,336				423,120
Equipment		142,500				123,000
Accum. depreciation—Equipment		(44,125	)			(53,500	)
Total assets	$	558,711			$	492,620
Liabilities and Equity
Accounts payable	$	68,141			$	137,175
Short-term notes payable		14,500				9,000
Total current liabilities		82,641				146,175
Long-term notes payable		57,500				63,750
Total liabilities		140,141				209,925
Equity
Common stock, $5 par value		192,750				165,250
Paid-in capital in excess of par, common stock		52,500				0
Retained earnings		173,320				117,445
Total liabilities and equity	$	558,711			$	492,620

  

FORTEN COMPANY Income Statement For Year Ended December 31, 2017
Sales				$	657,500
Cost of goods sold					300,000
Gross profit					357,500
Operating expenses
Depreciation expense	$	35,750
Other expenses		147,400			183,150
Other gains (losses)
Loss on sale of equipment					(20,125	)
Income before taxes					154,225
Income taxes expense					45,250
Net income				$	108,975

Additional Information on Year 2017 Transactions

1. The loss on the cash sale of equipment was $20,125 (details in b).
2. Sold equipment costing $91,875, with accumulated depreciation of $45,125, for $26,625 cash.
3. Purchased equipment costing $111,375 by paying $60,000 cash and signing a long-term note payable for the balance.
4. Borrowed $5,500 cash by signing a short-term note payable.
5. Paid $57,625 cash to reduce the long-term notes payable.
6. Issued 4,000 shares of common stock for $20 cash per share.
7. Declared and paid cash dividends of $53,100.

Required:
1. Prepare a complete statement of cash flows; report its operating activities using the indirect method. (Amounts to be deducted should be indicated with a minus sign.)

Answer 1

Cash Flow Statement (Indirect Method)
Particulars	Amount	Amount
Net Income		$    108,975.00
Adjustments to reconcile net income to:
Net cash provided by operating activities
Gain on sale of Plant
Depreciation	$      35,750.00
Loss on sale of Equipment	$      20,125.00
Increase in Accounts Receivable	$    (22,795.00)
Increase in Inventory	$    (31,356.00)
Decrease in Prepayments	$           835.00
Decrease in Accounts Payable	$    (69,034.00)
Increase in Short term Notes Payable	$        5,500.00
Net Cash Generated		$    (60,975.00)
Net cash provided by operating activities	(A)	$      48,000.00
Cash Flows from Investing Activities
Purchase of Plant and Equipment	$    (60,000.00)
Sale of Plant and Equipment	$      26,625.00
Net cash provided by investing activities	(B)	$    (33,375.00)
Cash Flows from Financing Activities
Dividend Paid	$    (53,100.00)
Reduction in Long term Notes Payable	$    (57,625.00)
Issued Common Stock	$      80,000.00
Net cash provided by Financing activities	(C')	$    (30,725.00)
Net increase/decrease in cash	(A+B+C')	$    (16,100.00)
Add:Opening cash balance		$      88,500.00
Closing cash balance		$      72,400.00

Workings:

Plant and Equipment A/c
To Bal b/d		$ 123,000.00	By Disposal A/c		$      91,875.00
To Cash		$    60,000.00
To Notes Payable		$    51,375.00	By Bal c/d		$    142,500.00
		$ 234,375.00			$   234,375.00
		Disposal A/c
To Plant and Equip		$    91,875.00	By Depreciation		$      45,125.00
			By Loss		$      20,125.00
			By Cash		$      26,625.00
		$    91,875.00			$      91,875.00
		Accumulated Depreciation
To Disposal		$    45,125.00	By Beg. Balance		$      53,500.00
To End. Balance		$    44,125.00	By Depreciation		$      35,750.00
		$    89,250.00			$      89,250.00
		Long term Notes Payable
To Cash		$    57,625.00	By Beg. Balance		$      63,750.00
To End. Balance		$    57,500.00	By Equipment		$      51,375.00
		$ 115,125.00			$   115,125.00