12-17
Alternate Demonstration Problem
Chapter 12
The Carpet Company’s 2014 and 2015 balance sheets included the
following items:
December 31
2015 2014
Debits
Cash …………………………………………………………………… $10,500 $ 4,000
Accounts receivable………………..….….….….….….….…. 8,000 9,000
Merchandise inventory…………………….….…..….….…… 21,000 18,000
Equipment………………………………………………..….….….. 18,000 15,000
Totals………..………………………………..….….….…... $57,500 $46,000
Credits
Accumulated depreciation, equipment…..….….….….. $ 4,000 $ 3,000
Accounts payable……………….……………………………….. 7,000 5,000
Taxes payable………………..……………………..…….….…... 1,000 2,000
Dividends payable……………….…………………………….… 1,500 0
Common stock, $10 par value…………………..………….. 27,000 25,000
Contributed capital in excess of par, common stock 6,000 5,000
Retained earnings………………………………..….….….…... 11,000 6,000
Totals………..………………………………..….….….…... $57,500 $46,000
The Carpet Company’s income statement was as follows:
CARPET COMPANY
Income Statement
For the Year Ended December 31, 2015
Sales ……………….………………………………………………….. $61,000
Cost of goods sold………….…………………………………... $40,000
Wages and other operating expenses……………..……. 6,300
Income taxes expense………………….…….…..….….….… 4,200
Depreciation expense…………….………..…..….….….…... 1,500 52,000
Net income……………..……………………………….….….…... $ 9,000
12-18
Required:
Prepare the statement of cash flows under both the direct method and the
indirect method for the year ended December 31, 2015. Additional
information includes the following:
a. Equipment costing $3,500 was purchased during the year.
b. Fully depreciated equipment that cost $500 was discarded and its
cost and accumulated depreciation were removed from the
accounts.
c. Two hundred shares of stock were sold and issued at $15 per share.
d. The company declared $4,000 of cash dividends and paid $2,500.
12-19
Solution: Alternate Demonstration Problem
Chapter 12
Direct Method:
CARPET COMPANY
Statement of Cash Flows
For Year Ended December 31, 2015
Cash flows from operating activities:
Cash received from customers……………………….… $ 62,000
Cash paid for merchandise……………….….…..….….. (41,000)
Cash paid for wages and other operating
Cash flows from investing activities:
Cash paid for purchase of plant assets…..….…..... (3,500 )
Net cash used by investing activities…................. (3,500)
Cash flows from financing activities:
Cash received from issuing stock………..….….….… 3,000
12-20
Indirect Method:
CARPET COMPANY
Statement of Cash Flows
For Year Ended December 31, 2015
Cash flows from operating activities:
Net income……………..…………………………………….….…... $ 9,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Decrease in accounts receivable………………………. 1,000
Increase in merchandise inventory…….….….….….. (3,000)
Increase in accounts payable……….….….….…..…... 2,000
Decrease in taxes payable…………….………………….. (1,000)
Depreciation expense…………….……….….…..….….… 1,500
Net cash provided by operating activities….......... $ 9,500
Cash flows from investing activities:
Cash paid for purchase of plant asset…..….….…... (3,500 )
Net cash used by investing activities…................. (3,500)
Cash flows from financing activities:
Cash received from issuing stock…………….….…... 3,000
Cash paid for dividends……………….…………………… (2,500 )
Net cash provided by financing activities............. 500
Net increase in cash………………………………………………. 6,500
Cash balance at end of 2014…………………..…..….….….. 4,000
Cash balance at end of 2015…………………..…..….….….. $10,500
12-21