Concept explainers
Statement of
• LO4–8
The Diversified Portfolio Corporation provides investment advice to customers. A condensed income statement for the year ended December 31, 2018, appears below:
Service revenue | $900,000 |
Operating expenses | 700,000 |
Income before income taxes | 200,000 |
Income tax expense | 80,000 |
Net income | $120,000 |
The following balance sheet information also is available:
12/31/2018 | 12/31/2017 | |
Cash | $275,000 | $ 70,000 |
120,000 | 100,000 | |
Accounts payable (operating expenses) | 70,000 | 60,000 |
Income taxes payable | 10,000 | 15,000 |
In addition, the following transactions took place during the year:
1. Common stock was issued for $100,000 in cash.
2. Long-term investments were sold for $50,000 in cash. The original cost of the investments also was $50,000.
3. $80,000 in cash dividends was paid to shareholders.
4. The company has no outstanding debt, other than those payables listed above.
5. Operating expenses include $30,000 in
Required:
1. Prepare a statement of cash flows for 2018 for the Diversified Portfolio Corporation. Use the direct method for reporting operating activities.
2. Prepare the cash flows from operating activities section of Diversified’s 2018 statement of cash flows using the indirect method.
(1)

Cash flow statement:
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.
To prepare: A statement of cash flow for D corporation using direct method for reporting operating activities.
Explanation of Solution
Prepare a statement of cash flow for corporation D using direct method.
Corporation D Statement of cash flows for the year ended December 31, 2018 |
||
Particulars | Amount ($) | Amount ($) |
Cash flows from operating activities: | ||
Collections from customers (1) | 880,000 | |
Payment of operating expenses (2) | (6,60,000) | |
Payment of income taxes (3) | (85,000) | |
Net cash flows from operating activities | 135,000 | |
Cash flows from investing activities: | ||
Sale of investments | 50,000 | |
Net cash flows from investing activities | 50,000 | |
Cash flows from financing activities: | ||
Proceeds from issue of common stock | 1,00,000 | |
Payment of dividends | (80,000) | |
Net cash flows from financing activities | 20,000 | |
Increase in cash | 2,05,000 | |
Cash and cash equivalents, January 1 | 70,000 | |
Cash and cash equivalents, December 31 | 275,000 |
(Table 1)
Working notes:
(1)
(3)
(2)

To prepare: The cash flows from operating activities section of Corporation D’s 2018 statement of cash flow for Corporation, under the indirect method.
Explanation of Solution
Prepare the cash flow from operating activities section of Corporation using indirect method:
Corporation D Statement of cash flows For the year ended December 31, 2018 |
|
Particulars | Amount ($) |
Cash flows from operating activities: | |
Net income | 120,000 |
Adjustments for noncash effects: | |
Depreciation expense | 30,000 |
Changes in operating assets and liabilities: | |
Increase in accounts receivable | (20,000) |
Increase in accounts payable | 10,000 |
Decrease in income taxes payable | (5,000) |
Net cash flows from operating activities | 135,000 |
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