Question

A comparative balance sheet for Rocker Company appears below:ROCKER COMPANYComparative Balance SheetDec. 31, 2020 Dec. 31, 2019Assets Cash $34,000 $11,000Accounts receivable 18,000 13,000Inventory 25,000 17,000Prepaid expenses 6,000 9,000Long-term investments 0 17,000Equipment 60,000 33,000Accumulated depreciation-equipment (20,000) (15,000)Total assets $123,000 $85,000Liabilities and Stockholder's Equity Accounts payable $17,000 $7,000Bonds payable 36,000 45,000Common stock 40,000 23,000Retained earnings 30,000 10,000Total liabilities and stockholders' equity $123,000 $85,000Additional information:1. Net income for the year ending December 31, 2020 was $35,000.2. Cash dividends of $15,000 were declared and paid during the year.3. Long-term investments that had a cost of $17,000 were sold for $14,000.4. Sales for 2017 were $120,000.Prepare a statement of cash flows for the year ended December 31, 2020 using indirect method.

Answer 1

The statement of cash flows for Rocker Company for the year ended December 31, 2020, created using the indirect method, begins with the net income, adjusts for non-cash items and changes in working capital, and reflects the cash effects of investing and financing activities.

Step-by-step explanation:

To create a statement of cash flows for the year ended December 31, 2020 using the indirect method for Rocker Company, we need to adjust the net income for the changes in the balance sheet accounts. Starting with the net income of $35,000, we would add back non-cash expenses such as depreciation and adjust for the changes in operating assets and liabilities. Below is an example of how this might look:

Cash Flows from Operating Activities:

Net Income: $35,000

Adjustments for non-cash items:

• Depreciation Expense: $5,000 (added back)

Changes in operating assets and liabilities:

• Accounts Receivable: $(5,000)
• Inventory: $(8,000)
• Prepaid Expenses: $3,000
• Accounts Payable: $10,000
• Net Cash Provided by Operating Activities: $40,000

Cash Flows from Investing Activities:

Sale of Long-term Investments: $14,000

Purchase of Equipment: $(27,000)

Net Cash Used in Investing Activities: $(13,000)

Cash Flows from Financing Activities:

Reduction in Bonds Payable: $9,000

Issuance of Common Stock: $17,000

Dividends Paid: $(15,000)

Net Cash Provided by Financing Activities: $11,000

Net Increase in Cash: $38,000

Cash at Beginning of Period: $11,000

Cash at End of Period: $34,000

Answer 2

Answer and Explanation:

The preparation of the cash flow statement is presented below:

Rocker Company

Cash flow statement

Cash flow from operating activities

Net Income $35000

Adjustments made

Depreciation $5,000

Loss on sale of investments $3,000

Change in operating assets & liabilities

Less: Increase in accounts receivable -$5,000

Less: Increase in inventory -$8,000

Add: Decrease in prepaid expenses $3,000

Add: Increase in accounts payable $10,000

Net cash flow from operating activities (a) $43,000

Cash Flow from Investing activities

Sale of long term investments $14,000

Less: Purchase of equipment -$27000

Net cash Flow from Investing activities (b)-$13,000

Cash Flow from Financing activities

Dividends paid -$15,000

Less: Bonds payable paid -$9,000

Add: Common stock issued $17,000

Net cash Flow from Financing activities (c) -$7,000

Net Change in cash c = a + b + c $23,000

Add: Beginning cash balance $11,000

Closing cash balance $34,000