Adirondack Toys, Inc. activities in 20X4 included the following:

The company purchased 40% of the stock of Lake Placid Toy Company for $3,848,000 cash.
The company issued $1,906,000 in long-term dbt; $850,000 of the proceeds was used to retire debt that became due in 20X4 and was listed on the books at $900,000.
Purchased property, plant, and equipment for $1,986,000 cash, and sold property with a book value of $576,000 for $500,000 cash.
The company signed a note payable for the purchase of new equipment; the obligation was listed at $516,000.
Executives excercised stock options for 8000 shares of common stock, paying cash of $170,000.
On December 30, 20X4, the firm bought Sanchez Musical Instruments Company by issuing common stock with a market value of $297,000.
The company issued common stock for $3,300,000 cash.
The firm withdrew $800,000 cash from a money market fund that was considered a cash equivalent.
The company bought $249,000 of treasury stock to hold for future exercise of stock options.
Long-term debt of $960,000 was converted to common stock.
Selected results for the year follow:

Net Income $672,000
Depreciation and amortization 615,000
Increase in inventory 72,000
Decrease in accounts receivable 19,000
Increase in accounts and wages payable 7,000
Increase in taxes payable 35,000
Interest expense 144,000
Increase in accrued interest payable 15,000
Sales 9,739,000
Cash dividends received from investments 152,000
Cash paid to suppliers and employees 8,074,000
Cash dividends paid 240,000
Cash paid for taxes 390,000

Prepare a statement of cash flows for 20X4 using the direct method. Include a schedule that reconciles net income to net cash provided by operating activities. Also include a schedule of noncash investing and financing activities.

Please see the guidelines for posting homework in the red print at the top of this forum.

this is what I've came up with so far:

Statment of Cash Flows
Adirondack Toys, Inc.
For the year ending 20X4


Cash Flows From Operating Activities
Cash Collected 9,808,000
Dividends Received 152,000
Cash Paid to Suppliers and Employers (8,139,000)
Cash Paid for Income Taxes (425,000)
Cash Paid for Interest (129,000)
totals (8,693,000) 9,960,000
Net Cash Used by Operating Activities 1,267,000
Cash Flows From Investing Activies
For purchase of Fixed Assets (1,986,000)
Purchase of Lake Placid Toy Co. Common Stock (3,848,000)

From Sale of Fixed Assets 500,000
From Issuing Long Term Debt (1,906,000)
From Sale of Money Market Fud 800,000
totals (7,740,000) 1,300,000
Net Cash Used by Investing Activities (6,440,000)
Cash Flows From Financing Activities
Proceeds From Long Term Debt Issuance 850,000
For Retiring Debt 50000
For Sales Loss (76,000)
For Repurchase of Common Stock (170,000)
From Issuance of Common Stock 3,300,000
For Purchase of Treasury Stock (249,000)
totals (495,000) 4,200,000
Net Cash Used by Financing Activities 3,705,000
Total (1,468,000)



Schedule of Non-Cash Investing & Financing Activities
Note Payable for Purchasing of New Equipment 516,000
Common Stock Issued to Acquire Sanchez Musical Instruments 297,000
Cash Dividends Paid 240,000
Long Term Debt Converted to Common Stock 960,000
2,013,000



Net Income 672,000
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation 615,000
Sales Loss 76,000
Net Decrease in Accounts Receivable 69000
Net Increase in Inventory (72,000)
Net Increase in Accounts and WagesPaybable 7000
Increase in Taxes Payable 35,000
Increase in Accrued Interest Payable 15000
Interest Expense (144,000)
Net cash provided by operating activities 1,273,000

I can't seem to produce the correct statement of cash flows using the direct method and a schedule that reconciles net income to net cash.

I can't get the operating activities to reconcile either, but here's what I can tell you that is wrong:



Cash Flows From Operating Activities
Dividends Received 152,000

Not an operating activity. It's related to an investment. It does have to be adjusted for the indirect method and this is not the only one where you're mixing up direct and indirect. Remember that in direct, you have to say where the cash directly went to or came from. Adding 152K for dividends received is like saying you received the cash for them, which you did - but it's not an operating activity. In the indirect method, you're starting with net income and making adjustments to it, and you'll be adjusting things that don't belong in operating - but that's an entirely different thing.



Cash Paid to Suppliers and Employers (8,139,000)
Cash Paid for Income Taxes (425,000)

This is either incorrect or the problem was presented badly. It says "Cash paid to supplies and employers" and "Cash paid for income taxes." If it's "cash paid," then why adjust it? Notice the interest says "Interest expense," which needs adjusted to cash. If it says cash, it's either lying or it doesn't need adjusted to cash. (And even if you had to adjust the taxes, you'd subtract it not add. You're not being consistent. All accruals adjust the opposite direction of the change for direct method. i.e. taxes payable increased so you'd decrease -- that's a different rule than for indirect. And yup, you got to keep it all straight.)



Cash Flows From Investing Activies
From Issuing Long Term Debt (1,906,000)

Two things wrong here. Part of it was used to retired another debt. I'm not quite sure if they want those two things listed separately. There's not a lot of info on that retirement of debt so it's hard telling. But more importantly, it's not an investing activity. ALL debt activities are financing.


From Sale of Money Market Fud 800,000

They were a cash equivalent. So you traded cash for cash. This was never listed as an investment.

You missed the dividends received in here. Again, the dividends are related to an investing activity.



Cash Flows From Financing Activities
Proceeds From Long Term Debt Issuance 850,000
For Retiring Debt 50000

Again, not enough info there to know exactly what's going on. If the new debt went through the financial institute, it's not really a cash activity at all. I'm also not sure what that extra 50,000 is about -- I think I took it as meaning they must've retired some bonds or something at a gain, but didn't say so. I think this is a bit of a problem with knowing how your book states things and therefore how to interpret them.

Either way, you missed the new debt cause you've got it up in investing.


For Sales Loss (76,000)

OK, first, be more specific. That sounds like you lost sales. It's a loss on sale of assets. Second, assets aren't financing activities - they're investing activities. Third, the loss itself doesn't even go into the investing activities because it's already 'included' in the cash received for the sale. Fourth, it's only use in the indirect method and goes into operating as an adjustment and you have it there as well.

In other words, a gain/loss on a sale of something is ONLY used as an adjustment in the operating section on an indirect method, and that is because it doesn't belong in operating. In a direct method, you aren't starting with net income, so it isn't there to begin with.





Schedule of Non-Cash Investing & Financing Activities
Cash Dividends Paid 240,000

How can CASH dividends be a non-cash event?




Net Income 672,000
Adjustments to reconcile net income to net cash provided by operating activities
Interest Expense (144,000)

Interest Expense doesn't belong in indirect. Again, remember you're starting with net income and adjusting stuff. Since interest expense is an operating activity (for the sake of a cash flow anyway), it's already been accounted for in net income, so we don't have to put it in. An indirect method is NOT revenues and expenses. Those are already in the net income.

You basically have three types of adjustments for an indirect method. Again, keep in mind you're starting with net income that includes every revenue, expense, gain and loss in it.
1) Accrued to cash. That is your adjustments for accruals and deferrals, since revenues and expenses don't match cash. You do have an adjustment for the interest payable, the accrued account. That is the same type of adjustment as your other payables. Don't make something special of it just cause it's interest. (You're mixing up with direct method.)
2) Non-cash items such as depreciation. Because cash was never paid for these, they have to be gotten rid of out of net income.
3) Things that don't belong in operating. We take gains and losses out cause they belong in investing (or even financing). If you had a complicated income statement there could be more nasty stuff. You also missed one in this category. Think about what ended up in net income that doesn't belong in operating.