Question

The Murdock Corporation reported the following balance sheet data for 2021 and 2020: 2021 2020 Cash $ 77,375 $ 22,955 Available-for-sale debt securities (not cash equivalents) 15,500 85,000 Accounts receivable 80,000 68,250 Inventory 165,000 145,000 Prepaid insurance 1,500 2,000 Land, buildings, and equipment 1,250,000 1,125,000 Accumulated depreciation (610,000 ) (572,000 ) Total assets $ 979,375 $ 876,205 Accounts payable $ 76,340 $ 148,670 Salaries payable 20,000 24,500 Notes payable (current) 25,000 75,000 Bonds payable 200,000 0 Common stock 300,000 300,000 Retained earnings 358,035 328,035 Total liabilities and shareholders' equity $ 979,375 $ 876,205 Additional information for 2021: (1) Sold available-for-sale debt securities costing $69,500 for $74,000. (2) Equipment costing $20,000 with a book value of $5,000 was sold for $6,000. (3) Issued 6% bonds payable at face value, $200,000. (4) Purchased new equipment for $145,000 cash. (5) Paid cash dividends of $20,000. (6) Net income was $50,000. Required: Prepare a statement of cash flows for 2021 in good form using the indirect method for cash flows from operating activities. (Amounts to be deducted should be indicated with a minus sign.)

Answer 1

Answer and Explanation:

The preparation of the statement of cash flows using the indirect method for operating activities section which is presented below:

Murdock Corporation

Cash flow statement

Cash flow from operating activities

Net income $50,000

Adjustments:

Depreciation expenses $610000 - [$572,000 - ($20,000 - $5,000)] $53,000

Less: Gain on sale of Available for sale securities ($69,500 - $74,000) ($4,500)

Less: Gain on sale of Equipment ($5,000 - $6,000) ($1,000)

Less: Increase in Accounts receivable ($68,250 - $80,000) ($11,750)

Less: Increase in inventory ($145,000 - $165,000) ($20,000)

Add: Decrease in Prepaid Insurance ($2,000 - $1,500) $500

Less: Decrease in Accounts payable ($76,340 - $14,8670) ($72,330)

Less: Decrease in Salaries payable ($20,000 - $24,500) ($4,500)

Less: Decrease in Notes payable ($25,000 - $75,000) ($50,000)

Net Cash flow used by operating activities ($60,580.00)

The rise in current assets and a reduction in current liabilities would be subtracted while the reduction in current assets and rise in current liabilities would be added.

In addition to this, the depreciation expense is added to the net income and the loss on sale of assets is added whereas the gain on sale of assets is subtracted. The same is done above.