Question
The 2017 and 2016 balance sheets of Wallace Corporation follow. The 2017 income statement is also...
The 2017 and 2016 balance sheets of Wallace Corporation follow. The 2017 income statement is also provided. WallaceWallace had no noncash investing and financing transactions during 2017. During the year, the company sold equipment for $15,300, which had originally cost $13,600 and had a book value of $11,400. The company did not issue any notes payable during the year but did issue common stock for $35,000. The company purchased plant assets and long-term investments with cash.
| Wallace Corporation | |||
| Income Statement | |||
| For the Year Ended December 31, 2017 | |||
| Sales revenues | $348,000 | ||
| Less: Cost of goods sold | 73,000 | ||
| Gross profit | $275,000 | ||
| Less operating expenses: | |||
| Salaries and wages expense | $26,000 | ||
| Depreciation expense | 4,600 | ||
| Other operating expenses | 14,000 | ||
| Total operating expenses | 44,600 | ||
| Operating income | $230,400 | ||
| Plus other income and less other expenses: | |||
| Interest expense | 9,700 | ||
| Gain on sale of PP&E | 3,900 | ||
| Total other income and expenses | 5,800 | ||
| Income before income taxes | 224,600 | ||
| Less: Income tax expense | 37,300 | ||
| Net income | $187,300 | ||
| Wallace Corporation | |||
| Comparative Balance Sheets | |||
| December 31, 2017 and 2016 | |||
| Assets | 2017 | 2016 | |
| Current assets: | |||
| Cash | $52,000 | $23,500 | |
| Accounts receivable | 31,800 | 29,700 | |
| Inventory | 86,000 | 93,600 | |
| Prepaid insurance | 3,000 | 2,400 | |
| Total current assets | $172,800 | $149,200 | |
| Property, plant, and equipment | 155,000 | 136,000 | |
| Less: Accumulated depreciation | (30,200) | (27,800) | |
| Investments | 115,000 | 0 | |
| Total assets | $412,600 | $257,400 | |
| Liabilities | |||
| Current liabilities: | |||
| Accounts payable | $33,000 | $36,600 | |
| Wages payable | 2,600 | 7,700 | |
| Interest payable | 2,500 | 0 | |
| Income taxes payable | 5,200 | 0 | |
| Other accrued expenses payable | 18,600 | 22,100 | |
| Total current liablities | $61,900 | $66,400 | |
| Long-term liabilities | 77,000 | 116,000 | |
| Total liabilities | $138,900 | $182,400 | |
| Stockholders' equity | |||
| Common stock | $107,000 | $72,000 | |
| Retained earnings | 166,700 | 3,000 | |
| Total stockholders' equity | $273,700 | $75,000 | |
| Total liabilities and equity | $412,600 | $257,400 | |
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Requirements
1. Prepare the statement of cash flows for WallaceWallace Corporation for 2017 using the indirect method.
2. Evaluate the company's cash flows for the year. Discuss each of the categories of cash flows in your response.
Answers
1 Wallace Wallace Corporation Cash Flow Statement For Current Year Ended December 31 2017 Cash flow from Operating Activities Net Income $187,300 Adjustments to reconcile net income to net cash provided by operations Depreciation expense $4,600 Inventory Decrease $7,600 Decrease in Prepaid insurance -$600 Account payable decrease -$3,600 Decrease in wages payable -$5,100 Income taxes payable increase $5,200 Account receivable increase -$2,100 Decrease in other accrued expense payable -$3,500 Interest expense $9,700 Gain on sale of PP&E -$3,900 (A) Net cash generated from Operating Activities $195,600 Cash flow from Investing activities Purchase of PP&E(Working Note-1) -$32,600 Sale of PP&E(given in question) $15,300 Purchase of Investments -$115,000 (B) Net cash used in Investing activities -$132,300 ('C) Cash flow from financing activities Interest paid( 9700+opening interest payable-closing interest payable) = 9700-2500 -$7,200 Payment of long term liabilities(Note payable) -$39,000 Issue of Common stock $35,000 Dividend paid(Working Note-2) -$23,600 Net cash used in financing activities -$34,800 Net Increase/(decrease) in Cash (A+B+C) $28,500 Cash balance at December 31, 2016 $23,500 Cash balance at December 31, 2017 $52,000 Working Note-1 Calculation of Addition/Deletion in Property, Plant and equipment Opening PP&E $136,000 Less: PP&E sold during the year $13,600 $122,400 Closing Balance (155,000-122,400) $155,000 Hence, Purchase of PP&E $32,600 Working Note -2 Calculation of Dividend paid Opening balance in retained earnings $3,000 Add: Profit earned during the year $187,300 Less: Closing balance of retained earnings $166,700 Dividend paid $23,600 2 Cash flows from Operating $195,600 Cash flows from Investing -$132,300 Cash flows from Financing -$34,800 (a) The overall cash flow of the company is positive $28,500, which is good sign. Further the Operating cash flows of the company is positive which is a good sign for Company. (b) Cash flows from Investing activities are Negative, It implies that Company is investing money. Investment helps the company in growth. (c ) The Financing cash flows are negative mainly due to payment of loan note and dividend. Please Note that answer of part 2 of the question is subjective matter and it depends upon marks of the question allocated to it. I've highlighted the main points. If you need more explanation please let me know in the comment section.
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