Maurice Tutor
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PROBLEM 14–13 Prepare and Interpret a Statement of Cash Flows [LO1, LO2]
A comparative balance sheet for Alcorn Company containing data for the last two years is as follows:
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Cash and cash equivalents . . . . . . . . . |
$Â Â Â Â 71,000 |
 |
$Â Â Â Â 50,000 |
|
Accounts receivable . . . . . . . . . . . . . . . |
590,000 |
 |
610,000 |
|
Inventory . . . . . . . . . . . . . . . . . . . . . . . |
608,000 |
 |
420,000 |
|
Prepaid expenses . . . . . . . . . . . . . . . . |
10,000 |
 |
5,000 |
|
Total current assets . . . . . . . . . . . . . . . . . |
1,279,000 |
 |
1,085,000 |
|
Property, plant, and equipment . . . . . . . . |
2,370,000 |
 |
1,800,000 |
|
Less accumulated depreciation . . . . . . |
615,000 |
 |
560,000 |
|
Net property, plant, and equipment . . . . . |
1,755,000 |
 |
1,240,000 |
|
Long-term investments . . . . . . . . . . . . . . |
80,000 |
 |
130,000 |
|
Loans to subsidiaries . . . . . . . . . . . . . . . . |
120,000 |
 |
70,000 |
|
Total assets . . . . . . . . . . . . . . . . . . . . . . . |
$3,234,000 |
 |
$2,525,000 |
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Accounts payable . . . . . . . . . . . . . . . . . |
$Â Â 870,000 |
 |
$Â Â 570,000 |
|
Accrued liabilities . . . . . . . . . . . . . . . . . |
25,000 |
 |
42,000 |
|
Income taxes payable . . . . . . . . . . . . . |
133,000 |
 |
118,000 |
|
Total current liabilities . . . . . . . . . . . . . . . |
1,028,000 |
 |
730,000 |
|
Bonds payable . . . . . . . . . . . . . . . . . . . . . |
620,000 |
 |
400,000 |
|
Total liabilities . . . . . . . . . . . . . . . . . . . . . |
1,648,000 |
 |
1,130,000 |
|
Stockholders’ equity: Common stock . . . . . . . . . . . . . . . . . . . |
 1,090,000 |
 |
 1,000,000 |
|
Retained earnings . . . . . . . . . . . . . . . . |
496,000 |
 |
395,000 |
|
Total stockholders’ equity . . . . . . . . . . . . . |
1,586,000 |
 |
1,395,000 |
|
Total liabilities and stockholders’ equity . . . |
$3,234,000 |
 |
$2,525,000 |
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The following additional information is available about the company’s activities during this year:
a.      The company declared and paid a cash dividend this year.
b.      Bonds with a principal balance of $380,000 were repaid during this year.
c.      Equipment was sold during this year for $70,000. The equipment had cost $130,000 and had
$40,000 in accumulated depreciation on the date of sale.
d.      Long-term investments were sold during the year for $110,000. These investments had cost
$50,000 when purchased several years ago.
e.      The subsidiaries did not repay any outstanding loans during the year.
f.      
Alcorn did not repurchase any of its own stock during the year. The company reported net income this year as follows:
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Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . |
 |
 |
$3,000,000 |
|
Cost of goods sold . . . . . . . . . . . . . . . . . . |
 |
 |
1,860,000 |
|
Gross margin . . . . . . . . . . . . . . . . . . . . . . . |
 |
 |
1,140,000 |
|
Selling and administrative expenses . . . . . |
 |
 |
930,000 |
|
Net operating income . . . . . . . . . . . . . . . . |
 |
 |
210,000 |
|
Nonoperating items: Gain on sale of investments . . . . . . . . . |
 $60,000 |
 |
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Loss on sale of equipment . . . . . . . . . . |
20,000 |
 |
40,000 |
|
Income before taxes . . . . . . . . . . . . . . . . . |
 |
 |
250,000 |
|
Income taxes . . . . . . . . . . . . . . . . . . . . . . . |
 |
 |
80,000 |
|
Net income . . . . . . . . . . . . . . . . . . . . . . . . |
 |
 |
$ Â 170,000 |
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Required:
1.      Using the indirect method, prepare a statement of cash flows for this year.
2.      What problems relating to the company’s activities are revealed by the statement of cash flows that you have prepared?
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