Demonstration problem

Solution to demonstration problem

a.

Dells Company

Statement of cash flows

 For the year ended 2010 June 30

Cash flows from operating activities:

    

 Net income

  

$ 70,000

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

    

 Increase in accounts receivable

(60,000)

  

 Increase in merchandise inventory

(30,000)

  

 Increase in prepaid rent

(10,000)

  

 Increase in accounts payable

10,000

  

 Decrease in salaries payable

(10,000)

  

 Increase in federal income taxes payable

10,000

  

 Loss on sale of equipment

7,000

  

 Depreciation expense

20,000

  

 Net cash provided by operating activities

  

$7,000

Cash flows from investing activities:

    

 Proceeds from sale of equipment

$ 3,000

  

 Purchase of equipment

(220,000)

  

 Net cash used by investing activities

  

(217,000)

 Cash flows from financing activities:

    

 Proceeds from issuing common stock

$250,000

  

 Repayment of bank note

(50,000)

  

 Dividends paid

(40,000)

  

 Net cash provided by financing activities

  

160,000

Net increase (decrease) in cash

  

$(50,000)

 

 b.

Dells Corporation

Working paper to convert income statement from accrual basis to cash basis

For the year ended 2010 June 30
 

Accrual basis

  

Add

Deduct

Cash basis

(Cash flows From operating activities)

Sales

  

$1,000,000

  

$60,000a

  

$940,000

Cost of goods sold

$600,000

  

$30,000b

10,000c

$620,000

  

Salaries and wages expense

200,000

  

10,000d

  

210,000

  

Rent expense

40,000

  

10,000e

  

50,000

  

Depreciation expense

20,000

    

20,000

-0-

  

Interest expense

3,000

      

3,000

  

Loss on sale of equipment

7,000

    

7,000

-0-

  

Federal income taxes

60,000

    

10,000f

50,000

  
   

930,000

      

933,000

 Net income

  

$70,000

      

$ 7,000

a Increase in accounts receivable.

B  Increase in merchandise inventory.

C Increase in accounts payable.

D Decrease in salaries payable.

E  Increase in prepaid rent.

F  Increase in Federal Income Taxes Payable.

 

Dells Corporation

Partial Statement of cash flows- Direct Method

 For the Year Ended  2010 June 30

Cash flows from operating activities:

    

 Cash received from customers

$ 940,000

  

 Cash paid for merchandise

(620,000)

  

 Salaries and wages paid

(210,000)

  

 Rent paid

(50,000)

  

 Interest paid

(3,000)

  

 Federal income taxes paid

(50,000)

  

Net cash provided by operating activities

  

$ 7,000