DISCUSSION 5.1 You are a loan officer for First Benevolent Bank. You have an uneasy feeling as you examine a loan application from Daring Corporation. The application included the following financial statements.

DARING CORPORATION Income Statement For the Year Ended December 31, 2011

Sales revenue $100,000

Cost of goods sold (50,000)

Depreciation expense (5,000)

Remaining expenses(25,000)

Net income $20,000

 

DARING CORPORATION Balance Sheet December 31, 2011

Cash $5,000

Accounts receivable 25,000

Inventory 20,000

Depreciable assets 55,000

Accumulated depreciation(5,000)

Total$100,000

 

Accounts payable $10,000

Interest payable 5,000

Note payable 45,000

Common stock 20,000

Retained earnings20,000

Total$100,000

 

It is not Daring's profitability that worries you. The income statement submitted with the application shows net income of $20,000 in Daring's first year of operations. By referring to the balance sheet, you see that this net income represents a 20% rate of return on assets of $100,000. Your concern stems from the recollection that the note payable reported on Daring's balance sheet is a two-year loan you approved earlier in the year.

You also recall another promising new company that, just last year, defaulted on another of your bank's loans when it failed due to its inability to generate sufficient cash flows to meet its obligations. Before requesting additional information from Daring, you decide to test your memory of the intermediate accounting class you took in night school by attempting to prepare a statement of cash flows from the information available in the loan application.

How do I prepare a statement of cash flows using the indirect method with the above balance sheet and income statement? Thank you.