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Prepare the statement of cash flows using the indirect method

 The comparative balance sheet of TechSource at December 31, 20Y7 and 20Y6, is as follows: TECHSOURCE Comparative Balance Sheets December 31, 20Y7 and 20Y6 20Y7 20Y6 Changes Increase (Decrease) Assets Current assets: Cash $52,650 $36,200 $16,450 Accounts receivable 91,080 53,000 38,080 Inventory 62,150 59,700 2,450 Estimated returns inventory 5,300 4,300 1,000 Office supplies 480 600 (120) Prepaid insurance 2,650 3,000 (350) Total current assets $214,310 $156,800 $57,510 Property, plant, and equipment: Land $20,000 $20,000 $0 Store equipment 27,100 20,000 7,100 Accumulated depreciation—store equipment (5,700) (2,600) (3,100) Office equipment 15,570 10,000 5,570 Accumulated depreciation—office equipment (4,720) (2,230) (2,490) Total property, plant, and equipment $52,250 $45,170 $7,080 Total assets $266,560 $201,970 $64,590 Liabilities Current liabilities: Accounts payable $12,466 $5,216 $7,250 Customer refunds payable 7,954 7,454 500 Estimated coupons payable 2,000 1,600 400 Notes payable (current portion) 5,000 5,000 0 Salaries payable 1,140 1,500 (360) Unearned rent 1,800 2,400 (600) Total current liabilities $30,360 $23,170 $7,190 Notes payable 20,000 25,000 (5,000) Total liabilities $50,360 $48,170 $2,190 Stockholders' Equity Common stock $25,000 $25,000 $0 Retained earnings 191,200 128,800 62,400 Total stockholders' equity $216,200 $153,800 $62,400 Total liabilities and stockholders' equity $266,560 $201,970 $64,590 Additional data obtained from an examination of the accounts in the ledger for 20Y7 are as follows: Store equipment was acquired for $7,100 cash. Office equipment was acquired for $5,570 cash. Principal relating to the notes payable of $5,000 was paid. There was a $80,400 increase in Retained Earnings for net income. There was a $18,000 decrease in Retained Earnings for cash dividends declared. Required: Prepare a statement of cash flows, using the indirect method of presenting cash flows from (used for) operating activities. Use the minus sign to indicate cash outflows, cash payments, decreases in cash, or any negative adjustments.

To prepare the statement of cash flows using the indirect method, we will categorize the cash flows into operating, investing, and financing activities.

1. Cash Flows from Operating Activities

Net income:

  • Increase in Retained Earnings due to net income: $80,400

Adjustments to reconcile net income to net cash provided by operating activities:

  • Depreciation expense:
    • Store equipment: 3,1003,100
    • Office equipment: 2,4902,490
  • Increase in accounts receivable: (91,080−53,000)=(38,080)(91,080 - 53,000) = (38,080)
  • Increase in inventory: (62,150−59,700)=(2,450)(62,150 - 59,700) = (2,450)
  • Increase in estimated returns inventory: (5,300−4,300)=(1,000)(5,300 - 4,300) = (1,000)
  • Decrease in office supplies: (480−600)=120(480 - 600) = 120
  • Decrease in prepaid insurance: (2,650−3,000)=350(2,650 - 3,000) = 350
  • Increase in accounts payable: (12,466−5,216)=7,250(12,466 - 5,216) = 7,250
  • Increase in customer refunds payable: (7,954−7,454)=500(7,954 - 7,454) = 500
  • Increase in estimated coupons payable: (2,000−1,600)=400(2,000 - 1,600) = 400
  • Decrease in salaries payable: (1,140−1,500)=(360)(1,140 - 1,500) = (360)
  • Decrease in unearned rent: (1,800−2,400)=(600)(1,800 - 2,400) = (600)

Net cash provided by operating activities:

Net income80,400Adjustments:Depreciation expense3,100+2,490=5,590Increase in accounts receivable(38,080)Increase in inventory(2,450)Increase in estimated returns inventory(1,000)Decrease in office supplies120Decrease in prepaid insurance350Increase in accounts payable7,250Increase in customer refunds payable500Increase in estimated coupons payable400Decrease in salaries payable(360)Decrease in unearned rent(600)Net cash provided by operating activities52,120\begin{align*} \text{Net income} & \quad 80,400 \\ \text{Adjustments:} \\ \quad \text{Depreciation expense} & \quad 3,100 + 2,490 = 5,590 \\ \quad \text{Increase in accounts receivable} & \quad (38,080) \\ \quad \text{Increase in inventory} & \quad (2,450) \\ \quad \text{Increase in estimated returns inventory} & \quad (1,000) \\ \quad \text{Decrease in office supplies} & \quad 120 \\ \quad \text{Decrease in prepaid insurance} & \quad 350 \\ \quad \text{Increase in accounts payable} & \quad 7,250 \\ \quad \text{Increase in customer refunds payable} & \quad 500 \\ \quad \text{Increase in estimated coupons payable} & \quad 400 \\ \quad \text{Decrease in salaries payable} & \quad (360) \\ \quad \text{Decrease in unearned rent} & \quad (600) \\ \text{Net cash provided by operating activities} & \quad 52,120 \\ \end{align*}

2. Cash Flows from Investing Activities

Cash outflows:

  • Purchase of store equipment: 7,1007,100
  • Purchase of office equipment: 5,5705,570

Net cash used for investing activities:

(7,100+5,570)=(12,670)(7,100 + 5,570) = (12,670)

3. Cash Flows from Financing Activities

Cash inflows/outflows:

  • Payment of notes payable: 5,0005,000
  • Payment of cash dividends: 18,00018,000

Net cash used for financing activities:

(5,000+18,000)=(23,000)(5,000 + 18,000) = (23,000)

Summary of Cash Flows

Net increase in cash:

52,120−12,670−23,000=16,45052,120 - 12,670 - 23,000 = 16,450

Cash at the beginning of the year:

36,20036,200

Cash at the end of the year:

36,200+16,450=52,65036,200 + 16,450 = 52,650

The cash at the end of the year matches the balance sheet amount.

Here is the statement of cash flows using the indirect method:

TechSource

Statement of Cash Flows

For the Year Ended December 31, 20Y7

Cash flows from operating activities:

Net income$80,400Adjustments to reconcile net income to net cash provided by operating activities:Depreciation expense5,590Increase in accounts receivable(38,080)Increase in inventory(2,450)Increase in estimated returns inventory(1,000)Decrease in office supplies120Decrease in prepaid insurance350Increase in accounts payable7,250Increase in customer refunds payable500Increase in estimated coupons payable400Decrease in salaries payable(360)Decrease in unearned rent(600)Net cash provided by operating activities52,120\begin{align*} \text{Net income} & \quad \$80,400 \\ \text{Adjustments to reconcile net income to net cash provided by operating activities:} \\ \quad \text{Depreciation expense} & \quad 5,590 \\ \quad \text{Increase in accounts receivable} & \quad (38,080) \\ \quad \text{Increase in inventory} & \quad (2,450) \\ \quad \text{Increase in estimated returns inventory} & \quad (1,000) \\ \quad \text{Decrease in office supplies} & \quad 120 \\ \quad \text{Decrease in prepaid insurance} & \quad 350 \\ \quad \text{Increase in accounts payable} & \quad 7,250 \\ \quad \text{Increase in customer refunds payable} & \quad 500 \\ \quad \text{Increase in estimated coupons payable} & \quad 400 \\ \quad \text{Decrease in salaries payable} & \quad (360) \\ \quad \text{Decrease in unearned rent} & \quad (600) \\ \text{Net cash provided by operating activities} & \quad 52,120 \\ \end{align*}

Cash flows from investing activities:

Cash paid for purchase of store equipment(7,100)Cash paid for purchase of office equipment(5,570)Net cash used for investing activities(12,670)\begin{align*} \text{Cash paid for purchase of store equipment} & \quad (7,100) \\ \text{Cash paid for purchase of office equipment} & \quad (5,570) \\ \text{Net cash used for investing activities} & \quad (12,670) \\ \end{align*}

Cash flows from financing activities:

Payment of notes payable(5,000)Payment of cash dividends(18,000)Net cash used for financing activities(23,000)\begin{align*} \text{Payment of notes payable} & \quad (5,000) \\ \text{Payment of cash dividends} & \quad (18,000) \\ \text{Net cash used for financing activities} & \quad (23,000) \\ \end{align*}

Net increase in cash:

16,45016,450

Cash at the beginning of the year:

36,20036,200

Cash at the end of the year:

52,65052,650                                                                             52,650

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