Chapter 4, Problem 4.9P

Statement of cash flows

• 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
Accounts receivable	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 depreciation expense.

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.

To determine

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)

$\begin{array}{l}\text{Service revenue} =\$9,000,000\\ \text{Less: Accounts receivable }=\$20,000\\ =\$8,800,000\end{array}$ (2)

$\begin{array}{l}\text{Operating expense } =\$700,000\\ \text{Less: Depreciation} =\$30,000\\ \text{Less: Increase in accounts payable =} \$10,000\\ =\$640,000\\ \end{array}$

(3)

$\begin{array}{l}\text{Income tax expense } =\$80,000\\ \text{Plus: Decrease in income tax }=\$5,000\\ =\$85,000\\ \end{array}$

To determine

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