Chapter 12, Problem 4PA

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

Heads Up Company was started several years ago by two hockey instructors. The company’s comparative balance sheets and income statement follow, along with additional information.

	Current Year	Previous Year
Balance Sheet at December 31
Cash	$ 6,300	$4,000
Accounts Receivable	900	1,750
Equipment	5,500	5,000
Accumulated Depreciation—Equipment	(1,500)	(1,250)
	$11,200	$9,500
Accounts Payable	$ 500	$1,000
Salaries and Wages Payable	500	750
Note Payable (long-term)	1,700	500
Common Stock	5,000	5,000
Retained Earnings	3,500	2,250
	$11,200	$9,500
Income Statement
Service Revenue	$37,500
Salaries and Wages Expense	35,000
Depreciation Expense	250
Income Tax Expense	1,000
Net Income	$ 1,250

Additional Data:

1. a. Bought new hockey equipment for cash, $500.
2. b. Borrowed $1,200 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 this 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.