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226) Use the following financial statements and additional information to (1) prepare a complete
statement of cash flows for the year ended December 31, Year 2. The cash provided or used by
operating activities should be reported using the direct method, and (2) compute the company’s
cash flow on total assets ratio for Year 2.
Derby Company
Balance Sheets
At December 31
Year 2 Year 1
Assets:
Cash $ 85,600 $ 65,200
Accounts receivable, net 72,850 56,750
Merchandise inventory 157,750 144,850
Prepaid expenses 6,080 12,680
Equipment 280,600 245,600
Accumulated depreciation-Equipment (80,600) (97,600)
Total assets $522,280 $427,480
Liabilities:
Accounts payable $ 52,850 $ 45,450
Income taxes payable 15,240 12,240
Notes payable (long term) 59,200 79,200
Total liabilities $127,290 $136,890
Equity:
Common stock 200,000 150,000
Paid-in capital in excess of par 53,000 40,000
Retained earnings 141,990 100,590
Total equity $ 394,990 $290,590
Total liabilities and equity $ 522,280 $427,480
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Derby Company
Income Statement
For Year Ended December 31, Year 2
Sales $488,000
Cost of goods sold $212,540
Depreciation expense 43,000
Other operating expenses 106,260
Interest expense 6,400 (368,200)
Other gains (losses):
Gain on sale of equipment 4,700
Income before taxes 124,500
Income taxes expense 41,100
Net income $ 83,400
Additional Information
a. A $20,000 note payable is retired at its carrying value in exchange for cash.
b. The only changes affecting retained earnings are net income and cash dividends paid.
c. New equipment is acquired for $120,000 cash.
d. Received cash for the sale of equipment that had cost $85,000, yielding a gain of $4,700.
e. Prepaid expenses relate to Other Expenses on the income statement.
f. All purchases and sales of merchandise inventory are on credit.
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227) The following transactions and events occurred during the year. Assuming that this
company uses the indirect method to report cash provided by operating activities, indicate where
each item would appear on its statement of cash flows by placing an x in the appropriate column.
Statement of Cash Flows (Indirect Method)
Operating
Activities Investing
Activities Financing
Activities Noncash
Investing &
Financing
Paid cash for operating expenses
Issued common stock for land
Accounts receivable decreased in the year
Recorded depreciation expense
Income taxes payable increased during the year
Sold equipment for cash, yielding a gain
Paid cash for interest expense
Purchased land by for cash
Purchased long-term investment in bonds
Paid cash for retirement of note payable
228) A main purpose of the statement of cash flows is to report all the major cash ________ and
cash ________.
229) Investments that are readily convertible to a known amount of cash and are sufficiently
close to their maturity so that the market value is unaffected by interest rate changes are
________.
230) ________ activities include the cash effects of transactions and events that determine net
income.
231) ________ activities generally include those transactions and events that affect long-term
assets.
232) ________ activities include those transactions that affect long-term liabilities and equity.
233) Noncash financing and investing activities are disclosed in a ________ or in a separate
________.
234) The statement of cash flows is divided into three sections called the ________, ________,
and ________ sections.
235) Probably the most important section of the statement of cash flows in analyzing the
financial performance of a company’s ongoing business is the ________ section.
236) The cash flow on total assets ratio is computed by dividing ________ by ________.
237) Information to prepare the statement of cash flows usually comes from three sources: (1)
________, (2) ________, and (3) ________.
238) All cash transactions eventually affect noncash ________ accounts.
239) When preparing the operating section of the statement of cash flows using the indirect
method, noncash expenses are ________ net income.
240) The reporting of investing and financing activities is ________ under the direct and indirect
methods of preparing the statement of cash flows.
241) The use of a spreadsheet for analysis is especially useful when preparing the statement of
cash flows using the ________ method.
242) Computing operating cash flows by adjusting accrual-based net income is done when the
________ method is used.