P12-1 (Algo) Preparing a Statement of Cash Flows (Indirect Method) LO12-1, 12-2, 12-4, 12-6 Sharp Screen Films, Inc., is develop
ing its annual financial statements at December 31, current year. The statements are complete except for the statement of cash flows. The completed comparative balance sheets and income statement are summarized as follows: Current Year Prior Year Balance sheet at December 31 Cash $ 66,650 $ 65,900 Accounts receivable 19,150 25,750 Merchandise inventory 25,750 20,300 Property and equipment 213,450 152,500 Less: Accumulated depreciation (62,700 ) (47,750 ) $ 262,300 $ 216,700 Accounts payable $ 13,100 $ 23,200 Wages payable 5,200 5,700 Note payable, long-term 63,300 76,000 Common stock and additional paid-in capital 103,900 67,500 Retained earnings 76,800 44,300 $ 262,300 $ 216,700 Income statement for current year Sales $ 211,000 Cost of goods sold 108,000 Depreciation expense 14,950 Other expenses 44,600 Net income $ 43,450 Additional Data: Bought equipment for cash, $60,950. Paid $12,700 on the long-term note payable. Issued new shares of stock for $36,400 cash. Dividends of $10,950 were declared and paid. Other expenses all relate to wages. Accounts payable includes only inventory purchases made on credit. Prepare the statement of cash flows using the indirect method for the year ended December 31, current year. (List cash outflows as negative amounts.)
FCFF= Net Income+ Interest(1- tax rate)+ Depreciation+ working capital changes- capital investment
Now let us note some critical points and assumptions which are necessary to solve the question.
As the question says that the company will maintain its existing after tax return on capital invested next year, hence that means that the net income for the next year remains the same, which is $140.
It is also that the company expects it's Operating Income(EBIT) to increase by 6% every year, hence it's operating income(EBIT) for the next year will be $250*(1.06)= $265
Tax rate remains the same, that is, (60/200*100)= 30%
As there is no details with respect to working capital changes and any capital investment made, hence it is assumed to zero changes and no additional investment.
It is assumed that the depreciation method being followed is straight line method, hence depreciation value next year would be the same, that is, 150
