Question

Planner Corporation's comparative balance sheets are presented below.

PLANNER CORPORATION Comparative Balance Sheets December 31
Cash 2017 $ 21,570 2016 $ 10,700
A/R 2017 18,200 2016 23,400
Land 2017 18,000 2016 26,000
Building 2017 70,000 2016 70,000
Accumulated depreciation2017 (15,000) 2016 (10,000)
Total 2017 $112,770 2016 $120,100
Accounts payable 2017 $ 12,370 2016 $31,100
Common stock 2017 75,000 2016 69,000
Retained earnings 2017 25,400 2016 20,000
Total 2017 $112,770 2016 $120,100
Additional information: 1. Net income was $27,900. Dividends declared and paid were $22,500. 2. All other changes in noncurrent account balances had a direct effect on cash flows, except the change in accumulated depreciation. The land was sold for $5,900.
Instruction (a) Prepare a statement of cash flows for 2017 using the indirect method. (b) Compute free cash flow.

Answer 1

To prepare the statement of cash flows using the indirect method, follow these steps: start with net income, add back non-cash expenses, adjust for changes in non-current accounts, adjust for changes in current assets and liabilities, compute net cash provided/used by operating, investing, and financing activities, and add the net change in cash to the beginning cash balance to obtain the ending cash balance.

Step-by-step explanation:

To prepare the statement of cash flows using the indirect method, we need to consider all the changes in the balance sheet accounts and adjust them for non-cash items. Here are the steps:

1. Start with net income. In this case, the net income is $27,900.
2. Add back any non-cash expenses: depreciation. The change in accumulated depreciation is ($15,000 - (-$10,000)) = $5,000.
3. Adjust for changes in non-current accounts that have a direct effect on cash flows. In this case, the only change is the sale of land for $5,900.
4. Adjust for changes in current assets and current liabilities. In this case, the change in accounts receivable is ($18,200 - $23,400) = -$5,200, and the change in accounts payable is ($12,370 - $31,100) = -$18,730.
5. Compute the net cash provided/used by operating activities by summing all the adjustments.
6. Compute the net cash provided/used by investing activities by considering the change in non-current assets (only the land sale) and the change in cash.
7. Compute the net cash provided/used by financing activities by considering the change in common stock and retained earnings and the payment of dividends.
8. Sum up the net cash provided/used by operating, investing, and financing activities to arrive at the net change in cash.
9. Add the beginning cash balance to the net change in cash to obtain the ending cash balance. In this case, the ending cash balance is $21,570.