Chapter 12, Problem 12.6P

(Chapter Supplement C) Preparing a Statement of Cash Flows, Indirect Method, Using the T-Account Approach

Hanks Company is developing its annual financial statements at December 31, current year. The statements are complete except for the statement of cash flows. The completed comparative balance sheets and income statement are summarized as follows:

	Current Year	Prior Year
Balance sheet at December 31
Cash	$ 33,000	$ 18,000
Accounts receivable	26,000	28,000
Merchandise inventory	39,000	36,000
Fixed assets (net)	80,000	72,000
	$178,000	$154,000
Accounts payable	$ 27,000	$ 21,000
Wages payable	1,500	1,000
Note payable, long-term	42,000	48,000
Common stock, no par	78,500	60,000
Retained earnings	29,000	24,000
	$178,000	$154,000
Income statement for current year
Sales	$ 80,000
Cost of goods sold	(43,000)
Expenses	(30,000)
Net income	$ 7,000

Additional Data:

1. a. Bought fixed assets for cash, $12,000.
2. b. Paid $6,000 on the long-term note payable.
3. c. Sold unissued common stock for $18,500 cash.
4. d. Declared and paid a $2,000 cash dividend.
5. e. Incurred the following expenses: depreciation, $4,000; wages, $12,000; taxes, $2,000; and other, $12,000.

Required:

1. 1. Prepare the statement of cash flows T-accounts using the indirect method to report cash flows from operating activities.
2. 2. Prepare the statement of cash flows.
3. 3. Prepare a schedule of noncash investing and financing activities if necessary.

To determine

Prepare the T-accounts in order to report cash flows from operating activities by using indirect method.

Explanation of Solution

T-account:

T-account is the form of the ledger account, where the journal entries are posted to this account. It is referred to as the T-account, because the alignment of the components of the account resembles the capital letter ‘T’.

Following are the changes in cash accounts:

Cash (A)
Operating activities
(1) Net income	7,000	(4) Inventory	3,000
(2) Depreciation	4,000
(3) Accounts receivable	2,000
(5) Accounts payable	6,000
(6) Wages payable	500
Net cash flow provided by operating activities	16,500
Investing activities
		(7) Purchase of property, Plant and Equipment	12,000
		Net cash used in investing activities	12,000
Financing activities
(9) Proceeds from stock issuance	18,500	(8) Payment of long-term note
		(10) Payment of dividends
Net cash provided by financing activities	10,500
Net increase in cash and cash equivalents	15,000

Following are the changes in non-cash accounts:

Accounts receivable (A)
Beginning balance         28,000
	(3) Decrease	2,000
Ending balance              26,000

Inventory (A)
Beginning balance         68,000
(4) Increase                      7,000
Ending balance              75,000

Accounts payable (L)
	Beginning balance	21,000
	(5) Increase	6,000
	Ending balance	27,000

Wages payable (L)
	Beginning balance	1,000
	(6) Increase	5,00
	Ending balance	1,500

Fixed Assets-net (A)
Beginning balance           72,000
(7) Purchases                    12,000	(2) Depreciation	4,000
Ending balance                93,500

Note Payable Long-term (L)
	Beginning balance	48,000
(8) Payments	Borrowings	0
	Ending balance	42,000

Common stock (SE)
	Beginning balance	60,000
Stock repurchased                         0	(9) Stock issued	18,500
	Ending balance	78,500

Retained Earnings (SE)
	Beginning balance	24,000
(10) Dividends	(1) Net income	7,000
	Ending balance	29,000

Note: L represents liabilities, XA represents contra-asset, A represents asset and SE represents stockholders’ equity.

To determine

Prepare the statement of cash flows.

Explanation of Solution

Statement of cash flows:

This statement reports all the cash transactions which are responsible for inflow and outflow of cash, and result of these transactions is reported as ending balance of cash at the end of reported period.

Prepare the statement of cash flows for the current year of Company H.

Company H
Statement of Cash Flows (Indirect Method)
For the year ended
Particulars	Amount ($)	Amount ($)
Cash flows from operating activities:
Net income	7,000
Add: Depreciation expenses	4,000	11,000
Changes in current assets and current liabilities
Add: Decrease in accounts receivable	2,000
Less: Increase in merchandise inventory	(3,000)
Add: Increase in accounts payable	6,000
Add: Increase in wages payable	500
Net cash flows from operating activities		16,500
Cash flows from Investing activities:
Less: Purchase of fixed assets	(12,000)
Net cash flows from investing activities		(12,000)
Cash flows from Financing activities:
Less: Cash payments on long-term note	(6,000)
Add: Cash receipts from issuing stock	18,500
Less: Cash payments for dividends	(2,000)
Net cash flows from financing activities		10,500
Net increase (decrease) in cash		15,000
Cash balance at the beginning (January 1)		18,000
Cash balance at the end ( December 31)		33,000

Table (1)

To determine

Prepare the schedule of noncash investing and financing activities if necessary

Explanation of Solution

Noncash investing activities:

Noncash investing activities refer to the activities carried out by a company for acquisition of long term assets without inflow or outflow of cash in the statement of cash flows.

There is no need for preparing the schedule of noncash investing and financing activities as there are no noncash investing and financing activities during the year.