Question

Sheffer The Sheffer Company's statement of cash flows for 20 12 showed the following calculation of the cash flow from operating activities: Collections from customers $ 2,245 Payments to suppliers ( 1,375) Payments to employees ( 68 8) Payments to the IRS (for income tax) ( 72 ) Cash flow from operating activities $ 110 The company's balance sheet at the beginning and end of 20 12 showed the following: Beginning End of year of year Accounts payable $ 92 $ 103 Accounts receivable 218 262 Accumulated depreciation 93 122 Income tax payable 142 180 Merchandise inventory 141 189 Plant and equipment (at cost) 338 371 Wages payable 36 37 A note to the financial statements showed that the company bought plant and equipment during the year for $33. Required:

a. Prepare an income statement for the Sheffer Company for 2012.
b. Did the Sheffer Company use the direct or the indirect method in preparing its statement of cash flows?

Answer 1

The income statement, calculate the sales revenue and deduct the cost of goods sold, operating expenses, and taxes. The Sheffer Company used the indirect method in preparing its statement of cash flows.

Step-by-step explanation:

To prepare the income statement for the Sheffer Company for 2012, we need to determine the sales revenue and deduct the cost of goods sold, operating expenses, and taxes.

1. Sales revenue: The cash flow from operating activities shows that the company collected $2,245 from customers.
2. Cost of goods sold: The change in merchandise inventory is $189 - $141 = $48. Therefore, the cost of goods sold is $141 + $48 = $189.
3. Operating expenses: The payments to suppliers are $1,375, payments to employees are $688, and payments to the IRS for income tax are $72. Therefore, the total operating expenses are $1,375 + $688 + $72 = $2,135.
4. Taxes: The change in income tax payable is $180 - $142 = $38. Therefore, the taxes are $72 + $38 = $110.

Using these values, we can calculate the income statement:

• Sales revenue: $2,245
• Cost of goods sold: $189
• Operating expenses: $2,135
• Taxes: $110
• Net income: $2,245 - $189 - $2,135 - $110 = -$189

The Sheffer Company used the indirect method in preparing its statement of cash flows. This is determined based on the information provided, where the cash flow from operating activities is calculated by adjusting net income for non-cash expenses and changes in working capital accounts.