I need someone to put this in to a actuall statement of cash flows using the ind
ID: 2376843 • Letter: I
Question
I need someone to put this in to a actuall statement of cash flows using the indirect method please. When it is written in paragraph form I do not grasp it.
FARMER COMPANY
Comparative Balance Sheets
December 31,
December 31,
ASSETS
2011
2010
Cash
$ 14,000
$ 9,000
Accounts receivable
52,000
24,000
Inventory
87,000
40,000
Equipment
125,000
100,000
Accumulated depreciation
(42,000)
(34,000)
Prepaid expenses
4,000
2,000
Land
-0-
7,000
Building
50,000
-0-
Total Assets
$290,000
$148,000
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable
$ 25,000
$ 14,000
Interest payable
8,000
6,000
Taxes payable
37,000
11,000
Note payable
37,000
32,000
Bonds payable
75,000
50,000
Common stock, $10 par
75,000
25,000
Retained earnings
33,000
10,000
Total Liabilities and Stockholders' Equity
$290,000
$148,000
Additional 2011 information:
Net income, $31,000
Sold land for gain of $3,000
Paid dividends of $8,000
Issued $50,000 stock to purchase building
Required:
Using the indirect method, prepare a statement of cash flows for 2011 for Farmer Company using the form below.
Just make a statement of cash flows please, you do not need to use a specific form. I just cannot understand the answer that was in paragraph form.
FARMER COMPANY
Comparative Balance Sheets
December 31,
December 31,
ASSETS
2011
2010
Cash
$ 14,000
$ 9,000
Accounts receivable
52,000
24,000
Inventory
87,000
40,000
Equipment
125,000
100,000
Accumulated depreciation
(42,000)
(34,000)
Prepaid expenses
4,000
2,000
Land
-0-
7,000
Building
50,000
-0-
Total Assets
$290,000
$148,000
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable
$ 25,000
$ 14,000
Interest payable
8,000
6,000
Taxes payable
37,000
11,000
Note payable
37,000
32,000
Bonds payable
75,000
50,000
Common stock, $10 par
75,000
25,000
Retained earnings
33,000
10,000
Total Liabilities and Stockholders' Equity
$290,000
$148,000
Additional 2011 information:
Net income, $31,000
Sold land for gain of $3,000
Paid dividends of $8,000
Issued $50,000 stock to purchase building
Explanation / Answer
There are two different methods that can be used to report the cash flows of operating activities. There is the direct method and the indirect method.
The indirect method adjusts net income (rather than adjusting individual items in the income statement) for:
The indirect method uses net income as a starting point, makes adjustments for all transactions for non-cash items, then adjusts for all cash-based transactions. An increase in an asset account is subtracted from net income, and an increase in a liability account is added back to net income. This method converts accrual-basis net income (or loss) into cash flow by using a series of additions and deductions. The following rules can be followed to calculate cash flows from operating activities:
Under the indirect method, since net income is a starting point in measuring cash flows from operating activities, depreciation expenses must be added back to net income. So, depreciation expense is shown (or captioned) on the statement of cash flows. Also, in the indirect method cash paid for taxes and cash paid for interest must be disclosed.
The format of the indirect method appears in the following example. In the presentation format, cash flows are divided into the following general classifications:
The indirect method of presentation is very popular, because the information required for it is relatively easily assembled from the accounts that a business normally maintains in its chart of accounts. The indirect method is less favored by the standard-setting bodies, since it does not give a clear view of how cash flows through a business (as is shown under the direct method of presentation).
Statement of Cash Flows Indirect Method Example
For example, Lowry Locomotion constructs the following statement of cash flows using the indirect method:
Lowry Locomotion
Statement of Cash Flows
for the year ended 12/31x1
Cash flows from operating activities Net income $3,000,000 Adjustments for: Depreciation and amortization $125,000 Provision for losses on accounts receivable 20,000 Gain on sale of facility (65,000) 80,000 Increase in trade receivables (250,000) Decrease in inventories 325,000 Decrease in trade payables (50,000) 25,000 Cash generated from operations 3,105,000 Cash flows from investing activities Purchase of property, plant, and equipment (500,000) Proceeds from sale of equipment 35,000 Net cash used in investing activities (465,000) Cash flows from financing activities Proceeds from issue of common stock 150,000 Proceeds from issuance of long-term debt 175,000 Dividends paid (45,000) Net cash used in financing activities 280,000 Net increase in cash and cash equivalents 2,920,000 Cash and cash equivalents at beginning of period 2,080,000 Cash and cash equivalents at end of period $5,000,000