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Chapter 12: Statement of Cash Flows Problem
Condensed financial data used to prepare the Statement of Cash Flows is as follows:

ARMA COMPANY
Balance Sheet
December 31, 2011

Assets: 2011 2010Acct change
Cash$ 90,800$ 48,400
Accounts receivable 92,800 33,000 Incr $59,800 subtract (-) Inventories 112,500 102,850 Incr $9,650subtract (-) Prepaid Expenses 28,400 26,000 Incr $2,400subtract (-) Investments 138,000 114,000 Incr $24,000

Plant assets 270,000 242,500 Incr $27,500
Less: Accumulated depreciation (50,000) (52,000) Decr $2,000 Total$ 682,500$ 514,750

Liabilities and Stockholders’ Equity:
Accounts Payable$ 112,000$ 67,300 Incr $44,700 add (+) Accrued expenses payable 16,500 17,000 Decr $500subtract (-) Bonds payable 110,000 150,000 Decr $40,000
Common stock 220,000 175,000 Incr $45,000
Retained Earnings 224,000 105,450 Incr $118,550
Total$ 682,500$ 514,750

ARMA COMPANY
Income Statement
For the Year ended December 31, 2011

Sales$ 392,780
Less:
Cost of goods sold$ 135,460
Operating expenses 58,910
Income taxes 27,280
Interest expense 4,730
Loss on sale of plant assets 7,500 233,880
Net Income$ 158,900

Additional information:
1.Old plant assets with an original cost of $57,500 and accumulated depreciation of $48,500 were sold for $1,500 cash. 2.Depreciation expense is included in Operating expenses on the income statement. 3.Maturing bonds were retired at face value.

4.A cash dividend was declared and paid during the year.
Solution – Indirect Method:

ARMA COMPANY
Statement of Cash Flows
For the Year ended December 31, 2011

Operating activities:
Net Income$ 158,900
Adjustments:
Depreciation expense$ 46,500 (see note/formula below)
Loss on sale of plant assets 7,500
Increase in accounts receivable (59,800)
Increase in inventories (9,650)
Increase in prepaid expenses (2,400)
Increase in accounts payable 44,700
Decrease in accrued liabilities (500) 26,350

Net cash provided by operating activities$ 185,250

Investing activities:
Proceeds from sale of plant assets$ 1,500
Increase in (purchase of) plant assets (85,000)(see note/formula below)
Increase in (purchase of) investments (24,000)(= increase in investment acct)

Net cash used by investing activities (107,500)

Financing activities:
Retirement of bonds payable$ (40,000)(= decrease in B/P acct)
Payment of dividends (40,350)(see note below)
Sale of common stock 45,000(= increase in Com Stk acct)

Net cash used by financing activities (35,350)

Net increase in cash$ 42,400
Cash balance, beginning of year 48,400

Cash balance, end of year$ 90,800

Note:Solving for the amount of depreciation expense and purchase of plant assets can by solved by setting up t-accounts or using the “formulas” below (EB is the ending balance, BB is the beginning balance). For the amount of dividends paid, use the basic equation used on the statement of retained earnings (Beg RE + NI – Dividends = End RE).

Depreciation Expense = EB Accum Deprec + Accum Deprec on plant asset sold – BB Accum Deprec.

Cost of new plant assets purchased = EB Plant Assets + Original cost of plant asset sold – BB Plant Assets

Depreciation Expense = EB Accum Deprec + Accum Deprec on plant asset sold – BB Accum Deprec.

Cost of new plant assets purchased = EB Plant Assets + Original cost of plant asset sold – BB Plant Assets

Solution – Direct method (Operating activity section only):

ARMA COMPANY
Statement of Cash Flows
For the Year ended December 31, 2011

Operating...
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