I am struggling with the operating activities section of this as in what titles of accounts I should use in this section and do they decrease or increase the net income
2005 2004
Assets
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 53,875 $ 76,625
Accounts receivable . . . . . . . . . . . . . . . . . 65,000 49,625
Merchandise inventory . . . . . . . . . . . . . . . 273,750 252,500
Prepaid expenses . . . . . . . . . . . . . . . . . . . 5,375 6,250
Equipment . . . . . . . . . . . . . . . . . . . . . . . . 159,500 110,000
Accum. depreciation—Equipment . . . . . . . . (34,625) (44,000)
Total assets . . . . . . . . . . . . . . . . . . . . . . . $522,875 $451,000
Liabilities and Equity
Accounts payable . . . . . . . . . . . . . . . . . . . $ 88,125 $116,625
Short-term notes payable . . . . . . . . . . . . . 10,000 6,250
Long-term notes payable . . . . . . . . . . . . . 93,750 53,750
Common stock, $5 par value . . . . . . . . . . 168,750 156,250
Contributed capital in excess
of par, common stock . . . . . . . . . . . . . . 32,500 0
Retained earnings . . . . . . . . . . . . . . . . . . . 129,750 118,125
Total liabilities and equity . . . . . . . . . . . . . $522,875 $451,000
KAZAAM COMPANY
Income Statement
For Year Ended December 31, 2005
Sales . . . . . . . . . . . . . . . . . . . . . . . . . $496,250
Cost of goods sold . . . . . . . . . . . . . . 250,000
Gross profit . . . . . . . . . . . . . . . . . . . . 246,250
Operating expenses
Depreciation expense . . . . . . . . . . . $ 18,750
Other expenses . . . . . . . . . . . . . . . 136,500 155,250
Other gains (losses)
Loss on sale of equipment . . . . . . . 5,125
Income before taxes . . . . . . . . . . . . . . $ 85,875
Income taxes expense . . . . . . . . . . . . 12,125
Net income . . . . . . . . . . . . . . . . . . . . $ 73,750
Larson−Wild−Chiappetta:
Fundamental Accounting
Principles, Seventeenth
Edition
16. Reporting the Statement
of Cash Flows
Text © The McGraw−Hill
Companies, 2004
Chapter 16 Reporting the Statement of Cash Flows 663
Additional Information on Year 2005 Transactions
a. The loss on the cash sale of equipment is $5,125 (details in b).
b. Sold equipment costing $46,875, with accumulated depreciation of $28,125, for $13,625 cash.
c. Purchased equipment costing $96,375 by paying $25,000 cash and signing a long-term note payable
for the balance.
d. Borrowed $3,750 cash by signing a short-term note payable.
e. Paid $31,375 cash to reduce the long-term notes payable.
f. Issued 2,500 shares of common stock for $18 cash per share.
g. Declared and paid cash dividends of $62,125.
Required
1. Prepare a complete statement of cash flows; report its operating activities using the indirect method.
Disclose any noncash investing and financing activities in a note.
To prepare a statement of cash flows using the indirect method, we need to analyze the information given and categorize the transactions into operating activities, investing activities, and financing activities.
Operating Activities:
- Net Income: $73,750 (from the income statement)
- Depreciation Expense: $18,750 (from the income statement)
- Increase in Accounts Receivable: $15,375 ($65,000 - $49,625)
- Increase in Inventory: $21,250 ($273,750 - $252,500)
- Decrease in Prepaid Expenses: $875 ($6,250 - $5,375)
- Decrease in Accounts Payable: $28,500 ($116,625 - $88,125)
- Net Cash Provided by Operating Activities = Net Income + Depreciation Expense + Increase in Accounts Receivable + Increase in Inventory - Decrease in Prepaid Expenses - Decrease in Accounts Payable
Investing Activities:
- Proceeds from Sale of Equipment: $13,625 (from additional information)
- Cash Paid for Purchase of Equipment: -$71,375 ($96,375 - $25,000)
- Net Cash Used in Investing Activities = Proceeds from Sale of Equipment - Cash Paid for Purchase of Equipment
Financing Activities:
- Proceeds from Issuance of Common Stock: $45,000 (2,500 shares x $18 per share)
- Payments of Long-term Notes Payable: -$31,375 (from additional information)
- Dividends Paid: -$62,125 (from additional information)
- Net Cash Used in Financing Activities = Proceeds from Issuance of Common Stock - Payments of Long-term Notes Payable - Dividends Paid
Once you have calculated the totals for each section, you can prepare the statement of cash flows by organizing the data into the following format:
Statement of Cash Flows (Indirect Method)
For the Year Ended December 31, 2005
Operating Activities:
Net Income $73,750
Adjustments:
Depreciation Expense $18,750
Changes in operating assets and liabilities:
Increase in Accounts Receivable $15,375
Increase in Inventory $21,250
Change in Prepaid Expenses -$875
Decrease in Accounts Payable -$28,500
Net Cash Provided by Operating Activities ????
Investing Activities:
Proceeds from Sale of Equipment $13,625
Cash Paid for Purchase of Equipment -$71,375
Net Cash Used in Investing Activities ????
Financing Activities:
Proceeds from Issuance of Common Stock $45,000
Payments of Long-term Notes Payable -$31,375
Dividends Paid -$62,125
Net Cash Used in Financing Activities ????
Net Increase/Decrease in Cash ????
Cash at Beginning of Year $76,625
Cash at End of Year ????
Note: Noncash investing and financing activities should be disclosed in a note.
To prepare the operating activities section of the statement of cash flows using the indirect method, you need to analyze the changes in the company's current assets and liabilities from one year to another. This will involve identifying the titles of the accounts and determining whether they increase or decrease the net income.
Here are the steps to follow:
1. Start with the net income from the income statement. In this case, the net income for 2005 is $73,750.
2. Identify the changes in current assets (excluding cash) and current liabilities from the balance sheet. These changes will indicate whether they have increased or decreased the net income.
- Accounts Receivable: The accounts receivable increased by $15,375 ($65,000 - $49,625) from 2004 to 2005. An increase in accounts receivable means that sales were made but the cash was not received yet, thus decreasing the net income.
- Inventory: The merchandise inventory increased by $21,250 ($273,750 - $252,500) from 2004 to 2005. An increase in inventory means that more goods were purchased than sold, therefore decreasing the net income.
- Prepaid Expenses: The prepaid expenses decreased by $875 ($5,375 - $6,250) from 2004 to 2005. A decrease in prepaid expenses means that some of the prepaid expenses were used up during the year, thus increasing the net income.
- Accounts Payable: The accounts payable decreased by $28,500 ($88,125 - $116,625) from 2004 to 2005. A decrease in accounts payable means that some of the payable amount was paid off during the year, thus decreasing the net income.
3. Add or subtract the changes in these accounts from the net income. In this case, we have:
Net Income ($73,750)
- Increase in Accounts Receivable ($15,375)
- Increase in Inventory ($21,250)
+ Decrease in Prepaid Expenses $875)
- Decrease in Accounts Payable ($28,500)
= Net Cash Provided by Operating Activities
4. Calculate the net cash provided by operating activities by adding or subtracting the changes in these accounts from the net income:
$73,750 - $15,375 - $21,250 + $875 - $28,500 = $9,500
The net cash provided by operating activities is $9,500.
Remember to include any noncash investing and financing activities in the notes to the financial statements, as mentioned in the question.