Question

Problem 12-10A

Condensed financial data of Sage Hill, Inc. follow.

Sage Hill, Inc. Comparative Balance Sheets December 31
Assets		2017			2016
Cash		$ 164,832			$ 98,736
Accounts receivable		179,112			77,520
Inventory		229,500			209,814
Prepaid expenses		57,936			53,040
Long-term investments		281,520			222,360
Plant assets		581,400			494,700
Accumulated depreciation		(102,000	)		(106,080	)
Total		$1,392,300			$1,050,090
Liabilities and Stockholders’ Equity
Accounts payable		$ 208,080			$ 137,292
Accrued expenses payable		33,660			42,840
Bonds payable		224,400			297,840
Common stock		448,800			357,000
Retained earnings		477,360			215,118
Total		$1,392,300			$1,050,090

Sage Hill, Inc. Income Statement Data For the Year Ended December 31, 2017
Sales revenue				$792,458
Less:
Cost of goods sold		$276,338
Operating expenses, excluding depreciation		25,316
Depreciation expense		94,860
Income tax expense		55,651
Interest expense		9,649
Loss on disposal of plant assets		15,300		477,114
Net income				$ 315,344

Additional information:

1.		New plant assets costing $204,000 were purchased for cash during the year.
2.		Old plant assets having an original cost of $117,300 and accumulated depreciation of $98,940 were sold for $3,060 cash.
3.		Bonds payable matured and were paid off at face value for cash.
4.		A cash dividend of $53,102 was declared and paid during the year.

Further analysis reveals that accounts payable pertain to merchandise creditors.

Prepare a statement of cash flows for Sage Hill, Inc. using the direct method.

Answer 1

Under the direct method, before calculating net cash flows from operating activities, we will first calculate the components of operating activities section. We will analyse the previous year and current year figures to find out the increase or decrease in activity / transaction as per below:

1. Cash received from customers:

Sales $792458

Less: Increase in accounts receivables ($101592)

Cash received from customers $690866

2. Cash paid to suppliers:

Cost of the goods sold $276338

Add: Increase in inventory    $19686

Less: Increase in accounts payable ($70788)

Cash paid to suppliers    $225236

3. Operating cash payments:

Operating expenses $25316

Add: Increase in prepaid expenses $4896

Add: Decrease in accrued expenses $9180

Cash paid for operating expenses $39392

Now, we will prepare the statement of cash flows as per below (here also, we will analyse the increase or decrease in investing and financing activity / transactions for current year in relation to previous year):

Statement of cash flows for 2017:

Cash flows from operating activities:

Cash received from customers $690866

Cash paid to suppliers ($225236)

Operating expenses paid ($39392)

Income taxes paid ($55651)

Interest paid ($9649)

Net cash flows from operating activities $360938

Purchase of equipment ($204000)

Sale of old plant     $3060

Purchase of long term investments ($59160)

Cash from investing activities ($260100)

Dividends paid ($53102)

Bonds payable paid ($73440)

Common stock issued $91800

Cash from financing activities ($34742)

Net cash provided by operating

investing and financing activities $66096

Beginning cash balance $98736

Ending cash balance $164832