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Horngren'S Financial And Managerial Accounting
Found in: Page 792

Short Answer

Preparing the statement of cash flows—direct method

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

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

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

1. For store fixtures, $46,000

2. For merchandise inventory, $310,000

3. For rent expense on a store building, $18,000

c. Later in the year, DRC purchased merchandise inventory on account for $238,000. Before year-end, DRC paid $138,000 of this accounts payable.

d. During 2018, DRC sold 2,700 units of merchandise inventory for $400 each. Before year-end, the company collected 85% of this amount. Cost of goods sold for the year was $340,000, and ending merchandise inventory totaled $208,000.

e. The store employs three people. The combined annual payroll is $97,000, of which DRC still owes $6,000 at year-end.

f. At the end of the year, DRC paid income tax of $18,000. There was no income taxes payable.

g. Late in 2018, DRC paid cash dividends of $35,000.

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


1. Prepare DRC’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.

2. Prepare DRC’s balance sheet at December 31, 2018.

3. Prepare DRC’s statement of cash flows for the year ended December 31, 2018. Format cash flows from operating activities by the direct method


Net income for the year ended December 31, 2018 is $597,800

See the step by step solution

Step by Step Solution

Step 1: Income statement for the year ended December 31, 2018

Diversion Rare Coins

Income Statement

For the year ended December 31, 2018

Revenue (2,700 unitsx$400)$1,080,000
Cost of goods sold$340,000
Depreciation ($46,000/5)$9,200
Other operating expense ($97,000+$18,000)$115,000
Income tax$18,000
Net Income$597,800

Step 2: Balance sheet at December 31, 2018

Diversion Rare Coins

Balance Sheet

For the year ended December 31, 2018

Store Fixtures net ($46,000-$9,200)$36,800
Account Receivables ($1,080,000x15%)$162,000
Merchandise Inventory$208,000
Common stock$450,000
Retained earnings ($597,800-$35,000)$562,800
Account payable$100,000
Accrued liabilities $6,000

Step 3: Statement of cash flows using indirect method

Diversion Rare Coins

Statement of Cash Flows

For the year ended December 31, 2018

Cash Flows From Operating Activities:
Collection from customers($1,080,000x85%)$918,000
To account payables ($310,000+$138,000)($448,000)
To employees($91,000)
To operating expenses($18,000)
For income tax($18,000)
Net cash provided/ (used) in operating activities:
Purchase of store fixtures($46,000)
Net cash provided/ (used) in investing activities($46,000)
Cash Flows From Financing Activities:
Issuance of common stock$450,000
Dividend paid($35,000)
Net cash provided/ (used) in financing activities$415,000
Cash Balance, December 31, 2018$712,000

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