Chapter 12, Problem 4CP

Preparing and Interpreting a Statement of Cash Flows (Indirect Method)

Soft Touch Company was started several years ago by two golf instructors. The company’s comparative balance sheets and income statement are presented below, along with additional information.

	Current Year	Previous Year
Balance Sheet at December 31
Cash	$13,500	$ 8,000
Accounts Receivable	2,500	3,500
Equipment	11,000	10,000
Accumulated Depreciation—Equipment	(3,000)	(2,500)
	$24,000	$19,000
Accounts Payable	$ 1,000	$ 2,000
Salaries and Wages Payable	1,000	1,500
Note Payable (long-term)	3,000	1,000
Common Stock	10,000	10,000
Retained Earnings	9,000	4,500
	$24,000	$19,000
Income Statement
Service Revenue	$75,000
Salaries and Wages Expense	68,000
Depreciation Expense	500
Income Tax Expense	2,000
Net Income	$ 4,500

Additional Data:

1. a. Bought new golf clubs using cash, $1,000.
2. b. Borrowed $2,000 cash from the bank during the year.
3. c. Accounts Payable includes only purchases of services made on credit for operating purposes. Because there are no liability accounts relating to income tax, assume that Income Tax Expense was fully paid in cash.

Required:

1. 1. Prepare the statement of cash flows for the current year ended December 31 using the indirect method.
2. 2. Use the statement of cash flows to evaluate the company’s cash flows.

  TIP: Demonstration Case A provides an example of information to consider when evaluating cash flows.