The Indirect Method
Millennium Technologies
Income statement for the year ended December 31 2002.
Revenue:
Net sales $3,200,000
Interest revenue . 40,000
Gain on sales of marketable securities .. 34,000
Total revenue and gains . $3,274,000
Cost and expenses:
Cost of goods sold .. $1,620,000
Operating expenses including depreciation
Of $150,000) . 1,240,000
Interest expense . 42,000
Income taxes .. 100,000
Loss on sales of plant assets 12,000
Total costs, expenses and losses 3,014,000
Net income . $ 260,000
Additional information
1. Accounts receivables increased by $60,000.
2. Accrued interest receivable decreased by $2,000.
3. Inventory decreased by $60,000 and accounts payable to suppliers of merchandise decreased by $16,000.
4. Short term payments of operating expenses increased by $6,000 and accrued liabilities for operating expenses decreased by $8,000.
5. The liability for accrued interest payable increased by $4,000 during the year.
6. The liability for accrued income taxes payable decreased by $14,000 during the year.
7. The following schedule summarizes the total debit and credit entries during the year in other balance sheet accounts.
Debit credit
Marketable securities .. $60,000 $38,000
Notes receivables 44,000 28,000
Plant assets ... 500,000 36,000
Notes payable (short term borrowing) 92,000 82,000
Capital stock . 20,000
Additional paid in capital . 160,000
Retained earnings 120,000 260,000
8. The $36,000 in credit entries to the plant assets account is in net of any debits to accumulated depreciation when the plant assets were retired. Thus the $36,000 in credit entries represents the book value of all plant assets sold or retired during the year.
9. The $120,000 debit to the retained earnings represents dividends declared and paid during the year. The $260,000 credit entry represents the net income shown in the income statement.
10. All investing and financing activities were cash transactions.
11. Cash and cash equivalents amounted to $244,000 at the beginning of the year and to $164,000 at the end of the year.
Instructions
a. Prepare a statement of cash flow for the current year. Use the direct method of reporting cash-flows from the activities. Place brackets around dollar amounts representing cash out-flows. Show separately your computation of the following amounts:
1. cash received from customers
2. interest received
3. cash paid to suppliers and employees
4. interest paid
5. income taxes paid
6. proceeds from sales of marketable securities
7. proceeds from sales of plant assets
8. proceeds from issuing capital stock
b. explain the primary reason why:
1. The amount of cash provided by operating activities was substantially greater than the companys net.
2. There was a net decrease in cash over the year, despite the substantial amount of cash provided by operating activities.
c. Millenniums controller thinks that through more efficient cash management, the company could have held the increase in amounts receivable for the year to $10,000 without affecting net-income. Explain how holding down the growth in receivables affects cash. Compute the effects that limiting the growth to the above
