Principals of Accounting II

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Problem

Use the following financial statements and additional information to (1) prepare a complete statement of cash flows for the year ended December 31, Year 2. The cash provided or used by operating activities should be reported using the direct method, and (2) compute the company's cash flow on total assets ratio for Year 2.
Derby Company
Balance Sheets
At December 31
Year 2 Year 1
Assets:
Cash 85,600 65,200
Accounts receivable, net 72,850 56,750
Merchandise inventory 157,750 144,850
Prepaid expenses 6,080 12,680
Equipment 280,600 245,600
Accumulated depreciation-Equipment (80,600) (97,600)
Total assets 522,280 427,480
Liabilities:
Accounts payable 52,850 45,450
Income taxes payable 15,240 12,240
Notes payable (long term) 59,200 79,200
Total liabilities 127,290 136,890
Equity:
Common stock 200,000 150,000
Paid-in capital in excess of par 53,000 40,000
Retained earnings 141,990 100,590
Total equity 394,990 290,590
Total liabilities and equity 522,280 427,480
Derby Company
Income Statement
For Year Ended December 31, Year 2
Sales 488,000
Cost of goods sold 212,540
Depreciation expense 43,000
Other operating expenses 106,260
Interest expense 6,400 (368,200)
Other gains (losses):
Gain on sale of equipment 4,700
Income before taxes 124,500
Income taxes expense 41,100
Net income 83,400
Additional Information
a. A $20,000 note payable is retired at its carrying value in exchange for cash.
b. The only changes affecting retained earnings are net income and cash dividends paid.
c. New equipment is acquired for $120,000 cash.
d. Received cash for the sale of equipment that had cost $25,000, yielding a gain of $4,700.
e. Prepaid expenses relate to Other Expenses on the income statement.
f. All purchases and sales of merchandise inventory are on credit.

Worksheet

Requirement #1
Derby Company
Statement of Cash Flows (Direct Method)
For Year Ended December 31, Year 2
Requirement #2
(a)
(b)
(c)
(d)
(e)

Solution

Requirement #1
Derby Company
Statement of Cash Flows (Direct Method)
For Year Ended December 31, Year 2
Cash flows from operating activities:
Cash received from customers a 471,900
Cash paid for merchandise inventory b (218,040)
Cash paid for operating expenses c (99,660)
Cash paid for interest expense d (6,400)
Cash paid for income taxes e (38,100)
Net cash provided by operations 109,700
Cash flows from investing activities:
Cash received from sale of equipment f 29,700
Cash paid for purchase of equipment (120,000)
Net cash used by investing activities (90,300)
Cash flows from financing activities:
Cash received from stock issuance 63,000
Cash paid for retirement of note payable (20,000)
Cash paid for cash dividends g (42,000)
Net cash used by financing activities 1,000
Net increase in cash 20,400
Cash balance at beginning of year 65,200
Cash balance at end of year 85,600
Requirement #2
$109,700/[(522,280+427,480)/2] = 23.1%
(a) Sale 488,000
Increase in accounts receivable (16,100)
Cash collected from customers 471,900
(b) Cost of goods sold 212,540
Increase in merchandise inventory 12,900
Purchases of merchandise 225,440
Increase in accounts payable (7,400)
Cash paid for merchandise 218,040
(c) Other operating expenses 106,260
Decrease in prepaid expenses (6,600)
Cash paid for operating expenses 99,660
(d) Interest expense 6,400
(e) Income tax expense 41,100
Increase in income taxes payable (3,000
Cash paid for income taxes 38,100