Demonstration Problem 14-1 Using T-Accounts to Prepare the Statement of Cash Flows–Direct ...



Demonstration Problem 14-1 Using T-Accounts to Prepare the Statement of Cash Flows–Direct and Indirect Methods

Selected financial information for Hunt Company follows:

|Balance Sheets |

|December 31 |

| |2007 | |2008 | |

|Assets | | | | |

|Cash |$ 2,000 | |$ 1,000 | |

|Accounts Receivable |8,000 | |9,000 | |

|Merchandise Inventory |20,000 | |16,000 | |

|Equipment |27,000 | |30,000 | |

|Accumulated Depreciation |(12,000) | |(17,000) | |

|Land |15,000 | |29,000 | |

|Total Assets |$60,000 | |$68,000 | |

| | | | | |

|Liabilities | | | | |

|Accounts Payable (Inventory) |$ 6,000 | |$ 8,000 | |

|Salaries Payable |9,000 | |4,000 | |

|Notes Payable |20,000 | |14,000 | |

|Total Liabilities |35,000 | |26,000 | |

|Stockholders’ Equity | | | | |

|Common Stock, $10 Par Value |18,000 | |25,000 | |

|Retained Earnings |7,000 | |17,000 | |

|Total Stockholders’ Equity |25,000 | |42,000 | |

|Total Liabilities and Equity |$60,000 | |$68,000 | |

| | | | | |

|Income Statement |

|For the Year Ended December 31, 2008 |

| | | |

|Sales |$98,000 | |

|Cost of Goods Sold |62,000 | |

|Gross Profit |$36,000 | |

|Salaries Expense |(14,000) | |

|Depreciation Expense |(10,000) | |

|Operating Income |$12,000 | |

|Gain on Sale of Equipment |3,000 | |

|Net Income |$15,000 | |

| | | |

Other information:

1. During 2008, Hunt sold equipment that cost $6,000 for $4,000. Accumulated depreciation at the time of the sale was $5,000.

2. During 2008, Hunt paid cash dividends of $5,000 to stockholders.

Required

a. Analyze the financial statement data using the T-account approach and prepare a formal statement of cash flows for 2008 using the direct method.

b. Reconstruct the statement of cash flows using the indirect method.

Demonstration Problem 14-1 a. Work Paper T-Accounts

| |T-Accounts | |

| | | | | | | |

| |Cash | |Accounts Payable | |Common Stock | |

| | Bal. 2,000 | | | | | | | | |

| |Operating Activities | | | | | | | |

| | | | | | | | | | |

| | | | | | | | | | |

| |Investing Activities | |Salaries Payable | |Retained Earnings | |

| | | | | | | | | | |

| | | | | | | | | | |

| | | | | | | | | | |

| |Financing Activities | | | | | | | |

| | | | |Notes Payable | | | | |

| | | | | | | | | | |

| | Bal. 1,000 | | | | | | | | |

| | | | | | | | | | |

| |Accounts Receivable | | | | | | | |

| | | | | | | | | | |

| | | | | | | | | | |

| | | | | | | | | | |

| | | | | | | | | | |

| |Merchandise Inventory | | | | | | | |

| | | | | | | | | | |

| | | | | | | | | | |

| | | | | | | | | | |

| | | | | | | | | | |

| |Equipment | | | | | | | |

| | | | | | | | | | |

| | | | | | | | | | |

| | | | | | | | | | |

| | | | | | | | | | |

| |Accumulated Dep. | | | | | | | |

| | | | | | | | | | |

| | | | | | | | | | |

| | | | | | | | | | |

| | | | | | | | | | |

| |Land | | | | | | | |

| | | | | | | | | | |

| | | | | | | | | | |

| | | | | | | | | | |

| | | | | | | | | | |

Demonstration Problem 14-1 a. Work Paper

Statement of Cash Flows—Direct Method

|Hunt Company |

|Statement of Cash Flows |

|For the Year Ended December 31, 2004 |

| | | |

|Cash Flows from Operating Activities | | |

| Cash Inflow from Revenue | | |

| Cash Outflow for Inventory | | |

| Cash Outflow for Salaries Expense | | |

| | | |

|Net Cash Flow from Operating Activities | | |

| | | |

|Cash Flows from Investing Activities | | |

| Cash Inflow from Equipment Sale | | |

| Cash Outflow for Equipment Purchase | | |

| Cash Outflow for Land Purchase | | |

| | | |

|Net Cash Flow from Investing Activities | | |

| | | |

|Cash Flows from Financing Activities | | |

| Cash Inflow from Stock Issue | | |

| Cash Outflow for Debt Payment | | |

| Cash Payments for Dividends | | |

| | | |

|Net Cash Flow from Financing Activities | | |

| | | |

|Net Decrease in Cash | | |

|Beginning Cash Balance | | |

| | | |

|Ending Cash Balance | | |

| | | |

Demonstration Problem 14-1 b. Work Paper

Statement of Cash Flows—Indirect Method

|Hunt Company |

|Statement of Cash Flows |

|For the Year Ended December 31, 2004 |

| | | |

|Cash Flows from Operating Activities | | |

|Net Income | | |

|Add | | |

| Depreciation Expense (noncash) | | |

| Decrease in Inventory | | |

| Increase in Accounts Payable | | |

| Deduct | | |

| Increase in Accounts Receivable | | |

| Decrease in Salaries Payable | | |

| Gain on Sale of Equipment | | |

|Net Cash Flow from Operating Activities | |$ 22,000 |

| | | |

|Cash Flows from Investing Activities | | |

| Cash Inflow from Equipment Sale | | |

| Cash Outflow for Equipment Purchase | | |

| Cash Outflow for Land Purchase | | |

|Net Cash Flow from Investing Activities | |(19,000) |

| | | |

|Cash Flow from Financing Activities | | |

| Cash Inflow from Stock Issue | | |

| Cash Outflow for Debt Payment | | |

| Cash Payments for Dividends | | |

|Net Cash Flow from Financing Activities | |(4,000) |

| | | |

|Net Decrease in Cash | |$(1,000) |

|Beginning Cash Balance | | |

| | | |

|Ending Cash Balance | | |

| | | |

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