Demonstration Problem 14-1 Using T-Accounts to Prepare the Statement of Cash Flows–Direct and Indirect Methods

Selected financial information for Hunt Company follows:

Balance Sheets
December 31
2007 / 2008
Assets
Cash / $ 2,000 / $ 1,000
Accounts Receivable / 8,000 / 9,000
Merchandise Inventory / 20,000 / 16,000
Equipment / 27,000 / 30,000
Accumulated Depreciation / (12,000) / (17,000)
Land / 15,000 / 29,000
Total Assets / $60,000 / $68,000
Liabilities
Accounts Payable (Inventory) / $ 6,000 / $ 8,000
Salaries Payable / 9,000 / 4,000
Notes Payable / 20,000 / 14,000
Total Liabilities / 35,000 / 26,000
Stockholders’ Equity
Common Stock, $10 Par Value / 18,000 / 25,000
Retained Earnings / 7,000 / 17,000
Total Stockholders’ Equity / 25,000 / 42,000
Total Liabilities and Equity / $60,000 / $68,000
Income Statement
For the Year Ended December 31, 2008
Sales / $98,000
Cost of Goods Sold / 62,000
Gross Profit / $36,000
Salaries Expense / (14,000)
Depreciation Expense / (10,000)
Operating Income / $12,000
Gain on Sale of Equipment / 3,000
Net Income / $15,000

Other information:

1.During 2008, Hunt sold equipment that cost $6,000 for $4,000. Accumulated depreciation at the time of the sale was $5,000.

2.During 2008, Hunt paid cash dividends of $5,000 to stockholders.

Required

a.Analyze the financial statement data using the T-account approach and prepare a formal statement of cash flows for 2008 using the direct method.

b.Reconstruct the statement of cash flows using the indirect method.

Demonstration Problem 14-1 a. Work Paper T-Accounts

T-Accounts
Cash / Accounts Payable / Common Stock
Bal. 2,000
Operating Activities
Investing Activities / Salaries Payable / Retained Earnings
Financing Activities
Notes Payable
Bal. 1,000
Accounts Receivable
Merchandise Inventory
Equipment
Accumulated Dep.
Land

Demonstration Problem 14-1 a. Work Paper

Statement of Cash Flows—Direct Method

Hunt Company
Statement of Cash Flows
For the Year Ended December 31, 2004
Cash Flows from Operating Activities
Cash Inflow from Revenue
Cash Outflow for Inventory
Cash Outflow for Salaries Expense
Net Cash Flow from Operating Activities
Cash Flows from Investing Activities
Cash Inflow from Equipment Sale
Cash Outflow for Equipment Purchase
Cash Outflow for Land Purchase
Net Cash Flow from Investing Activities
Cash Flows from Financing Activities
Cash Inflow from Stock Issue
Cash Outflow for Debt Payment
Cash Payments for Dividends
Net Cash Flow from Financing Activities
Net Decrease in Cash
Beginning Cash Balance
Ending Cash Balance

Demonstration Problem 14-1 b. Work Paper

Statement of Cash Flows—Indirect Method

Hunt Company
Statement of Cash Flows
For the Year Ended December 31, 2004
Cash Flows from Operating Activities
Net Income
Add
Depreciation Expense (noncash)
Decrease in Inventory
Increase in Accounts Payable
Deduct
Increase in Accounts Receivable
Decrease in Salaries Payable
Gain on Sale of Equipment
Net Cash Flow from Operating Activities / $ 22,000
Cash Flows from Investing Activities
Cash Inflow from Equipment Sale
Cash Outflow for Equipment Purchase
Cash Outflow for Land Purchase
Net Cash Flow from Investing Activities / (19,000)
Cash Flow from Financing Activities
Cash Inflow from Stock Issue
Cash Outflow for Debt Payment
Cash Payments for Dividends
Net Cash Flow from Financing Activities / (4,000)
Net Decrease in Cash / $(1,000)
Beginning Cash Balance
Ending Cash Balance