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Comparative balance sheet accounts of Marcus Inc. are presented below. Net income for the year...

Question:

Comparative balance sheet accounts of Marcus Inc. are presented below.

MARCUS INC. Comparative Balance Sheet Accounts

As of December 31, 2014, and 2013

Debit Accounts December 31, 2014 December 31, 2013
Cash $42,000 $33,750
Accounts receivable 70,500 60,000
Inventory 30,000 24,000
Investments (available-for-sale) 22,250 38,500
Machinery 30,000 18,750
Buildings 67,500 56,250
Land 7,500 7,500
$269,750 $238,750
Credit Accounts
Allowance for doubtful accounts $2,250 $1,500
Accumulated Depreciation - Machinery 5,625 2,250
Accumulated Depreciation - Buildings 13,500 9,000
Accounts payable 35,000 24,750
Accrued payables 3,375 2,525
Long-term notes payable 21,000 31,000
Common stock, no-par 150,000 125,000
Retained earnings 39,000 42,625
$269,750 $238,750

Additional data (ignoring taxes):

1. Net income for the year was $42,500.

2. Cash dividends declared and paid during the year were $21,125.

3. A 20% stock dividend was declared during the year. $25,000 of retained earnings was capitalized. Investments that cost $25,000 were sold during the year for $28,750.

4. Machinery that cost $3,750, on which $750 of depreciation had accumulated, was sold for $2, 200. Marcus's 2014 income statement follows (ignoring taxes).

Sales Revenue $540,000
Less: Cost of goods sold 380,000
Gross margin 160,000
Less: Operating expenses (includes $8,625 depreciation and $5,400 bad debts) 120,450
Income from operation 39,550
Other: gain on sale of investments $3,750
Loss on sale of machinery (800) 2,950
Net income $42,500

Required

a. Compute net cash flow from operating activities using the direct method.

b. Prepare a statement of cash flows using the indirect method.

Statement of Cash Flow:

The two main ways to compile a statement of cash flow is through direct or indirect methods. The statement reconciles cash balances over two periods by utilizing the most recent income statement and last two balance sheets.

Answer and Explanation:


Both methods of preparing the statement of cash flow include the operating, investing, and financing activities. The main difference between the two methods is in the operating activities section. The indirect method of preparation through the operating activities section begins with net income from the profit and loss statement and combines back depreciation, amortization, and other non-cash expenditures to determine cash income or loss. The report then accounts for changes in working capital items from the balance sheet. Under the direct method of preparing the operating activities, the section includes cash collected from customers and cash paid to suppliers and employees. Cash collected from customers includes sales from the income statement and the net change to accounts receivables. Cash paid to suppliers and employees includes cash operating expenses from the income statement and all other changes to working capital accounts excluding cash and receivables. The investing activities section includes changes to non-current assets. The financing activities section includes changes to non-current liabilities and equity sections of the balance sheet. In both methods, the net changes to the three sections are combined with beginning cash to determine ending cash.


Indirect Method


Marcus, Inc.

Statement of Cash Flow

For the year ending December 31, 2014

Cash flows from operating activities
Profit 42,500
Adjustments for:
Depreciation Expense 8,625
Working capital changes:
(Increase) / Decrease in trade and other receivables -9,750
(Increase) / Decrease in inventories -6,000
Increase / (Decrease) in Accounts Payable 10,250
Increase / (Decrease) in Accrued Liabilities 850
Net cash generated (used) from operating activities 46,475
Cash flows from investing activities
Sale (Purchase) of Property, Plant, and Equipment -23,350
Sale (Acquisition) of portfolio investments 16,250
Net cash generated (used) from investing activities -7,100
Cash flows from financing activities
Proceeds (payments) from Long Term Payable -10,000
Proceeds (payments) from Bond Payable -21,125
Net cash generated (used) from financing activities -31,125
Net increase in cash and cash equivalents 8,250
Cash and cash equivalents at beginning of period 33,750
Cash and cash equivalents at end of period 42,000


Direct Method


Marcus, Inc.

Statement of Cash Flow

For the year ending December 31, 2014

Cash flows from operating activities
Cash receipts from customers
Sales 540,000
(Increase)Decrease in Receivables -9,750
Cash receipts from customers 530,250
Cash paid to suppliers and employees
Cost of Goods Sold -380,000
Operating Expenses -111,825
(Increase) / Decrease in Inventory -6,000
Increase/(Decrease) in Accounts Payable 10,250
Increase/(Decrease) in Accrued Expenses Payable 850
Cash paid to suppliers and employees -486,725
Net cash generated (used) from operating activities 43,525
Cash flows from investing activities
Net change in property, plant and equipment -24,150
(Acquisition) Liquidation of portfolio investments 20,000
Net cash generated (used) in investing activities -4,150
Cash flows from financing activities
Proceeds (Payments) from long-term payable -10,000
Dividends -21,125
Net cash generated (used) in financing activities -31,125
Net increase in cash and cash equivalents 8,250
Cash and cash equivalents at beginning of period 33,750
Cash and cash equivalents at end of period 42,000

Learn more about this topic:

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Using the Statement of Cash Flows for Decision Making

from Accounting 101: Financial Accounting

Chapter 12 / Lesson 5
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