Question

Heads Up Company was started several years ago by two hockey instructors. The company’s comparative balance sheets and income statement follow, along with additional information. Current Year Previous Year Balance Sheet at December 31 Cash $ 6,120 $ 4,040 Accounts Receivable 860 1,670 Equipment 5,060 4,600 Accumulated Depreciation—Equipment (1,420 ) (1,210 ) Total Assets $ 10,620 $ 9,100 Accounts Payable $ 740 $ 1,200 Salaries and Wages Payable 540 750 Note Payable (long-term) 1,600 500 Common Stock 4,600 4,600 Retained Earnings 3,140 2,050 Total Liabilities and Stockholders’ Equity $ 10,620 $ 9,100 Income Statement Service Revenue $ 40,300 Salaries and Wages Expense 37,800 Depreciation Expense 210 Income Tax Expense 1,200 Net Income $ 1,090 Additional Data: Bought new hockey equipment for cash, $460. Borrowed $1,100 cash from the bank during the year. Accounts Payable includes only purchases of services made on credit for operating purposes. Because there are no liability accounts relating to income tax, assume that this expense was fully paid in cash. Required: 1. Prepare the statement of cash flows for the current year ended December 31 using the indirect method. (Amounts to be deducted should be indicated with a minus sign.)

Answer 1

Answer and Explanation:

The preparation of the cash flow statements using the indirect method is shown below:

Cash flows from operating activities  

Net Income  $1,090

Adjustments made

Add: Depreciation expenses   $210

Add: Decrease in Accounts receivable $810  ($860 - $1,670)

Less Decrease in Accounts Payable $-460  ($740 - $1,200)

Less: Decrease in salaries & wages payable -$210 ($540 - $750)

Net cash from operating activities         1,440

Cash flows from investing activities  

Purchase of hockey equipment -$460

Net cash used investing activities  -$460

Cash flows from financing activities  

Borrowing from Long term notes payable $1,100  

Net cash from financing activities   $1,100

Net Increase in cash and cash equivalents   $2,080

Add: Beginning cash balance $4,040

Ending Balance            $6,120

The positive sign reflects the cash inflow and the negative sign indicates the cash outflow