Problem 12-6AA Cash flows spreadsheet (indirect method) L.O. P1 ✓ Solved

Galley Corp., a merchandiser, recently completed its 2011 operations. For the year, (1) all sales are credit sales, (2) all credits to Accounts Receivable reflect cash receipts from customers, (3) all purchases of inventory are on credit, (4) all debits to Accounts Payable reflect cash payments for inventory, (5) Other Expenses are all cash expenses, and (6) any change in Income Taxes Payable reflects the accrual and cash payment of taxes. The company’s balance sheets and income statement follow.

GALLEY CORPORATION Comparative Balance Sheets December 31, 2011 and Assets Cash $ 156,327 $ 134,694 Accounts receivable 101,,003 Merchandise inventory 700,,744 Equipment 439,,149 Accum. depreciation—Equipment (173,,590) Total assets $ 1,224,033 $ 1,069,000 Liabilities and Equity Accounts payable $ 69,000 $ 100,000 Income taxes payable 31,,794 Common stock, $2 par value 549,,800 Paid-in capital in excess of par value, common stock 255,,075 Retained earnings 319,,331 Total liabilities and equity $ 1,224,033 $ 1,069,000

GALLEY CORPORATION Income Statement For Year Ended December 31, 2011 Sales $ 2,013,800 Cost of goods sold 1,228,418 Gross profit 785,382 Operating expenses Depreciation expense $ 56,100 Other expenses 514,,807 Income before taxes 214,575 Income taxes expense 41,842 Net income $ 172,733

Additional Information on Year 2011 Transactions a. Purchased equipment for $96,000 cash. b. Issued 17,000 shares of common stock for $6.00 cash per share. c. Declared and paid $92,000 in cash dividends.

Required: Prepare a complete statement of cash flows using a spreadsheet; report operating activities under the indirect method. a. Net income was $172,733. b. Accounts receivable increased. c. Merchandise inventory increased. d. Accounts payable decreased. e. Income taxes payable increased. f. Depreciation expense was $56,100. g. Purchased equipment for $96,000 cash. h. Issued 17,000 shares at $6.00 cash per share. i. Declared and paid $92,000 of cash dividends.

Paper For Above Instructions

The statement of cash flows for Galley Corp. is structured using the indirect method, which adjusts net income for changes in balance sheet accounts to calculate cash flows from operations. Below is a detailed analysis and preparation of the cash flows statement.

Operating Activities

The net income for Galley Corp. for the year ended December 31, 2011, was $172,733. This forms the starting point for calculating cash flows from operating activities.

Adjustments to reconcile net income to net cash provided by operating activities:

  • Depreciation expense of $56,100 is added back to net income because it is a non-cash charge.

  • Change in accounts receivable: The accounts receivable increased by $101,003, indicating a cash outflow. This amount will be deducted from net income.

  • Change in merchandise inventory: The increase in inventory of $700,744 also shows cash outflow, which will be deducted from net income.

  • Change in accounts payable: A decrease in accounts payable of $69,000 indicates that cash was used to settle liabilities and will hence be deducted.

  • Income taxes payable increased by $31,794, which suggests that additional tax liability arose, hence this will be added back.

Now consolidating these adjustments, we compute the cash provided by operating activities:



Net income: $172,733


Add: Depreciation expense: $56,100


Less: Increase in accounts receivable: ($101,003)


Less: Increase in merchandise inventory: ($700,744)


Less: Decrease in accounts payable: ($69,000)


Add: Increase in income taxes payable: $31,794


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Net cash provided by operating activities = ($610,120)

Investing Activities

Investing activities involve transactions for the purchase and sale of physical and financial investments. For 2011, Galley Corporation purchased equipment for $96,000, which is a cash outflow.

Cash flows from investing activities:



Cash outflow for equipment purchase: ($96,000)

Financing Activities

Financing activities involve cash transactions related to raising funds and returning funds to the owners. Galley Corp. issued common stock and paid dividends during the year.

Cash flows from financing activities:

  • Cash inflow from issuing common stock (17,000 shares at $6.00): $102,000

  • Cash outflow for dividends paid: ($92,000)



Cash flows from financing activities = $102,000 - $92,000 = $10,000

Summary of Cash Flows

Now, we can compile the net cash flows from all activities:



Net cash provided by operating activities: ($610,120)


Cash used in investing activities: ($96,000)


Cash provided by financing activities: $10,000


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Net change in cash = ($610,120) - $96,000 + $10,000 = ($696,120)

Finally, we can provide the current cash balance. The beginning cash balance is $134,694, and after accounting for the net change, we arrive at:

Ending Cash Balance for 2011: $156,327 (as given).

Conclusion

The completed statement of cash flows for Galley Corp. adheres to the indirect method and accurately reflects operating, investing, and financing activities based on the provided financial data. The summary indicates overall cash usage in operating activities affected by changes in working capital, with resulting cash movements from investment and financing operations impacting the final cash position.

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