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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Statement of cash flows—direct method

The comparative balance sheet of Martinez Inc. for December 31, 20Y4 and 20Y3, is as follows:

  Dec 31, 20Y4 Dec. 31,20Y3
Assets    
Cash.................................. $ 661,920 $ 683,100
Accounts receivable (net).................................. 992,640 0 914,400
Inventories............................................... 1,394,40 1,363,800
Investments.............................................. 0 432,000
Land..................................................... 960,000 0
Equipment................................................ 1,224,000 984,000
Accumulated depreciation—equipment.................... (481,500) (368,400)
Total assets............................................ $4,751,460 $4,008,900
Liabilities and Stockholders' Equity    
Accounts payable......................................... $1,080,000 $ 966,600
Accrued expenses payable................................ 67,800 79,200
Dividends payable.................................. 100,800 91,200
Common stock. $S par .................................... 130,000 30,000
Paid in capital: Excess of issue price over par—common stock...... 950,000 450,000
Retained earnings......................................... 2,422,860 2,391,900
Total liabilities and stockholders' equity.................. $4,751,460 $4,008,900

The income statement for the year ended December 31, 20Y4, is as follows:

Sales..........................................   $4,512,000
Cost of merchandise sold.......................   2,352,000
Gross profit....................................   $2,160,000
Operating expenses:    
Depreciation expense....................... $ 113,100  
Other operating expenses................... 1,344,840  
Total operating expenses.................   1,457,940
Operating income..............................   $ 702,060
Other income:    
Gain on sale of investments..................   156,000
Income before income tax......................   $ 858,060
Income tax expense............................   299,100
Net income....................................   $ 558,960

Additional data obtained from an examination of the accounts in the ledger for 20Y4 are as follows:

a. Equipment and land were acquired for cash.

b. There were no disposals of equipment during the year.

c. The investments were sold for $588,000 cash.

d. The common stock was issued for cash.

e. There was a $528,000 debit to Retained Earnings for cash dividends declared.

Instructions

Prepare a statement of cash flows, using the direct method of presenting cash flows from operating activities.

To determine

Statement of cash flows

Statement of cash flow is a financial statement that shows the cash and cash equivalents of a company for a particular period of time. It shows the net changes in cash, by reporting the sources and uses of cash as a result of operating, investing, and financing activities of a company.

To prepare: The statement of cash flows using the direct method of presenting cash flows from operating activities.

Explanation

Working Notes:

Calculate the cash flows from operating activities.

Sales revenue $4,512,000
Less: Increase in accounts receivable (78,240)
Cash receipts from customers $4,433,760

Table (2) (1)

Calculate the cash payments for merchandise.

Cost of merchandise sold $2,352,000
Less: Increase in accounts payable (113,400)
Add: Increase in inventory 30,600
Cash payments for merchandise $2,269,200

Table (3) (2)

Calculate the cash payment for operating expenses...

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