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Horngren'S Financial And Managerial Accounting
Found in: Page 783

Short Answer

American Rare Coins (ARC) was formed on January 1, 2018. Additional data for the year follow:

a. On January 1, 2018, ARC issued no par common stock for $450,000.

b. Early in January, ARC made the following cash payments:

  1. For store fixtures, $53,000
  2. For merchandise inventory, $340,000
  3. For rent expense on a store building, $20,000

c. Later in the year, ARC purchased merchandise inventory on account for $239,000. Before year-end, ARC paid $139,000 of these accounts payable.

d. During 2018, ARC sold 2,400 units of merchandise inventory for $275 each. Before year-end, the company collected 85% of this amount. Cost of goods sold for the year was $250,000, and ending merchandise inventory totaled $329,000.

e. The store employs three people. The combined annual payroll is $96,000, of which ARC still owes $3,000 at year-end.

f. At the end of the year, ARC paid income tax of $17,000. There are no income taxes payable.

g. Late in 2018, ARC paid cash dividends of $44,000.

h. For store fixtures, ARC uses the straight-line depreciation method, over five years, with zero residual value.

Requirements

  1. What is the purpose of the statement of cash flows?
  2. Prepare ARC’s income statement for the year ended December 31, 2018. Use the single-step format, with all revenues listed together and all expenses listed together.
  3. Prepare ARC’s balance sheet at December 31, 2018.

Prepare ARC’s statement of cash flows using the indirect method for the year ended December 31, 2018.

  1. To know the exact details of the cash inflow and outflow.
  2. Net income for the year ended December 31, 2018, is $266,400
  3. Total assets are $775,400 and total liabilities and stockholders’ equity are $775,400
  4. Net cash flow for the year ended December 31, 2018, is $305,000
See the step by step solution

Step by Step Solution

Step 1: The purpose of the statement of cash flows

The cash flow statement is part of the financial statements. It shows the correct picture of the cash flow. It makes it easy for the reader of the financial statements to know how much the company has borrowed the amount or how much it invests. There are several incomes of the company, cash flow statements facilitate the reader to have a knowledge of the fund flow of the company’s primary business other than other incomes of the company.

Step 2: Income statement for the year ended December 31, 2018

American Rare Coins

Income Statement

For the year ended December 31, 2018

Revenues

Sales revenue (2,400 x $275)

$660,000

Expenses:

Cost of goods sold

$250,000

Depreciation($53,000 / 5)

$10,600

Other operating expense ($96,000+$20,000)

$116,000

Income tax

$17,000

Net Income

$266,400

Step 3: Balance sheet at December 31, 2018

American Rare Coins

Balance Sheet

For the year ended December 31, 2018

Current Assets:

Cash

$305,000

Merchandise Inventory

$329,000

Account Receivables ($660,000 x 15%)

$99,000

Long-term Assets:

Store Fixtures net

$42,400

Total Assets

$775,400

Current Liabilities:

Account payable

$100,000

Accrued liabilities

$3,000

Total Liabilities

$103,000

Stockholder’s Equity

Common stock

$450,000

Retained earnings ($266,400 - $44,000)

$222,400

Total Stockholder’s Equity

$672,400

Total Liabilities and Stockholder’s Equity

$775,400

Step 4: Statement of cash flows using the indirect method

American Rare Coins

Statement of Cash Flows

For the year ended December 31, 2018

Cash Flows From Operating Activities:

Net Income

$266,400

Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:

Depreciation expense

$10,600

Increase in account receivables ($660,000 – ($660,000x 85%)

($99,000)

Increase in merchandise inventory ($340,000 -$250,000)

($90,000)

Decrease in account payable($239000-$100,000)

($139,000)

Increase in accrued liabilities ($96,000 -$93,000)

$3,000

Net cash provided/ (used) in operating activities

($48,000)

Cash Flows From Investing Activities:

Purchase of store fixtures

($53,000)

Net cash provided/ (used) in investing activities

($53,000)

Cash Flows From Financing Activities:

Issuance of common stock

$450,000

Dividend paid

($44,000)

Net cash provided/ (used) in financing activities

$406,000

Net change in cash

$305,000

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