Cash flow information: Direct and indirect methods
The comparative year end balance sheets of Sign Graphics, Inc., revealed the following activity in the company’s current accounts:
19X5 19X4 Increase / Decrease)
Current assets
Cash $55,400 $35,200 $20,200
Accounts receivable (net) 83,800 88,000 4,200
Inventory 243,400 233,800 9,600
Prepaid expenses 25,400 24,200 1,200
Current liabilities
Accounts payable $123,600 $140,600 ($17,000)
Taxes payable 43,600 49,200 5,600
Interest payable 9,000 6,400 2,600
Accrued liabilities 38,800 60,400 21,600
Note payable 44,000 ” 44,000
The accounts payable were for the purchase of merchandise. Prepaid expenses and accrued liabilities relate to the firm’s selling and administrative expenses. The company’s condensed income statement follows.
SIGN GRAPHICS, INC.
Income Statement
For the Year Ended December 31, 19X5
Sales $713,800
Less:
Cost of goods sold 323,000
= Gross profit $390,800
Less:
Selling & administrative expenses $186,000
Depreciation expense 17,000
Interest expense 27,000
230,000
$160,800
Add:
Gain on sale of land 21,800
Income before taxes Income taxes $182,600
36,800
Net income $145,800
Other data:
1. Long term investments were purchased for cash at a cost of $74,600.
2. Cash proceeds from the sale of land totaled $76,200.
3. Store equipment of $44,000 was purchased by signing a short term note payable. Also, a $150,000 telecommunications system was acquired by issuing 3,000 shares of preferred stock.
4. A long term note of $49,400 was repaid.
5. Twenty thousand shares of common stock were issued at $5.19 per share.
6. The company paid cash dividends amounting to $128,600.
Instructions:
a. Prepare the operating activities section of the company’s statement of cash flows, assuming use of:
1. The direct method.
2. The indirect method.
b. Prepare the investing and financing activities sections of the statement of cash flows.