Direct vs Indirect

What are the differences between the direct and indirect method of presenting a statement of cash flows? Which method of presenting a statement of cash flows is the best? Why? Which method appears to be most preferred?

Cash Flow Statement

What does a statement of cash flows tell you about a company? Why is the statement of cash flows important? Can a company have profits but no cash? Why?

Question 1

The major classifications of activities reported in the statement of cash flows are operating, investing, and financing. Classify each of the transactions listed below as:
1 Operating activity-add to net income.
2 Operating activity-deduct from net income.
3 Investing activity.
4 Financing activity.
5 Reported as significant noncash activity

The transactions are as follows.

(a) Issuance of common stock.
(b) Purchase of land and building.
(c) Redemption of bonds
(d) Sale of equipment.
(e) Depreciation of machinery.
(f) Amortization of patent.
(g) Issuance of bonds for plant assets.
(h) Payment of cash dividends.
(i) Exchange of furniture for office equipment.
(j) Purchase of treasury stock.
(k) Loss on sale of equipment.
(l) Increase in accounts receivable during the year.
(m) Decrease in accounts payable during the year.

Question 2
A comparative balance sheet for Shabbona Corporation is presented below.
31-Dec
Assets 2014 2013
Cash $ 73,000 $ 22,000
Accounts receivable $82,000 $66,000
Inventory $180,000 $189,000
Land $71,000 $110,000
Equipment $260,000 $200,000
Accumulated Depreciation-Equipment (69,000 ) (42,000 )
Total $597,000 $545,000
Liabilities and Stockholders' Equity
Accounts payable $ 34,000 $ 47,000
Bonds payable $150,000 $200,000
Common stock ($1 par) $214,000 $164,000
Retained earnings $199,000 $134,000
Total $597,000 $545,000

Additional information:
1 Net income for 2014 was $125,000.
2 Cash dividends of $60,000 were declared and paid.
3 Bonds payable amounting to $50,000 were retired through issuance of common stock.

Prepare a statement of cash flows for 2014 for Shabbona Corporation. (Show amounts that decrease cash flow with either a - sign e.g. -15,000 or in parenthesis e.g. (15,000).)

Determine Shabbona Corporation's current cash debt coverage ratio, cash debt coverage ratio, and free cash flow.(Round ratios to 2 decimal places., e.g. 0.67.)

Question 3

Each of the following items must be considered in preparing a statement of cash flows (indirect method) for Turbulent Indigo Inc. for the year ended December 31, 2014. State where each item is to be shown in the statement of cash flows, if at all.

(a) Plant assets that had cost $20,000 6 years before and were being depreciated on a straight-line basis over 10 years with no estimated scrap value were sold for $5,300.

(b) During the year, 10,000 shares of common stock with a stated value of $10 a share were issued for $43 a share.

(c) Uncollectible accounts receivable in the amount of $27,000 were written off against Allowance for Doubtful Accounts.

(d) The company sustained a net loss for the year of $50,000. Depreciation amounted to $22,000, and a gain of $9,000 was realized on the sale of land for $39,000 cash.

(e) A 3-month U.S. Treasury bill was purchased for $100,000. The company uses a cash and cash-equivalent basis for its cash flow statement.
(f) Patent amortization for the year was $20,000.
(g) The company exchanged common stock for a 70% interest in Tabasco Co. for $900,000.
(h) During the year, treasury stock costing $47,000 was purchased.

Question 4
Condensed financial data of Pat Metheny Company for 2014 and 2013 are presented below.
PAT METHENY COMPANY
COMPARATIVE BALANCE SHEET
AS OF DECEMBER 31, 2014 AND 2013
2014 2013
Cash $1,800 $1,150
Receivables 1,750 1,300
Inventory 1,600 1,900
Plant assets 1,900 1,700
Accumulated depreciation (1,200 ) (1,170 )
Long-term investments (held-to-maturity) 1,300 1,420
$7,150 $6,300

Accounts payable $1,200 $900
Accrued liabilities 200 250
Bonds payable 1,400 1,550
Capital stock 1,900 1,700
Retained earnings 2,450 1,900
$7,150 $6,300

PAT METHENY COMPANY
INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2014
Sales revenue $6,900
Cost of goods sold 4,700
Gross margin 2,200
Selling and administrative expenses 930
Income from operations 1,270
Other revenues and gains
Gain on sale of investments 80
Income before tax 1,350
Income tax expense 540
Net income $810
Cash dividends 260
Income retained in business $550

Additional information:

During the year, $70 of common stock was issued in exchange for plant assets. No plant assets were sold in 2014.

Prepare a statement of cash flows using the indirect method. (Show amounts that decrease cash flow with either a - sign e.g. -15,000 or in parenthesis e.g. (15,000).)

Question 5
Condensed financial data of Pat Metheny Company for 2014 and 2013 are presented below.
PAT METHENY COMPANY
COMPARATIVE BALANCE SHEET
AS OF DECEMBER 31, 2014 AND 2013
2014 2013
Cash $1,800 $1,150
Receivables 1,750 $1,300
Inventory 1,600 $1,900
Plant assets 1,900 $1,700
Accumulated depreciation (1,200 ) (1,170 )
Long-term investments (held-to-maturity) 1,300 $1,420
$7,150 $6,300

Accounts payable $1,200 $900
Accrued liabilities 200 $250
Bonds payable 1,400 $1,550
Capital stock 1,900 $1,700
Retained earnings 2,450 $1,900
$7,150 $6,300

PAT METHENY COMPANY
INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2014
Sales revenue $6,900
Cost of goods sold 4,700
Gross margin 2,200
Selling and administrative expenses 930
Income from operations 1,270
Other revenues and gains
Gain on sale of investments 80
Income before tax 1,350
Income tax expense 540
Net income $810
Cash dividends 260
Income retained in business $550

Additional information:

During the year, $70 of common stock was issued in exchange for plant assets. No plant assets were sold in 2014.

Prepare a statement of cash flows using the direct method. (Show amounts that decrease cash flow with either a - sign e.g. -25,000 or in parenthesis e.g. (25,000).)