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(SCF—Direct and Indirect Methods from Comparative Financial Statements)Chapman Company, a major retailer of bicycles and accessories, operates several stores and is a publicly traded company. The comparative statement of financial position and income statement for Chapman as of May 31, 2010, are shown on the next page. The company is preparing its statement of cash flows.
Chapman Company
Comparative Statement of Financial Position
As of May31
2010
2009
Current assets
Cash
$ 28,250
$ 20,000
Accounts receivable
75,000
58,000
Merchandise inventory
220,000
250,000
Prepaid expenses
9,000
7,000
Total current assets
332,250
335,000
Plant assets
Plant assets
600,000
502,000
Less: Accumulated depreciation
150,000
125,000
Net plant assets
450,000
377,000
Total assets
$782,250
$712,000
Current liabilities
Accounts payable
$123,000
$115,000
Salaries payable
47,250
72,000
Interest payable
27,000
25,000
Total current liabilities
197,250
212,000
Long-term debt
Bonds payable
70,000
100,000
Total liabilities
267,250
312,000
Shareholders’ equity
Common stock, $10 par
370,000
280,000
Retained earnings
145,000
120,000
Total shareholders’ equity
515,000
400,000
Total liabilities and shareholders’ equity
$782,250
$712,000
Chapman Company
Income Statement
For the Year Ended May31, 2010
Sales
$1,255,250
Cost of merchandise sold
722,000
Gross profit
533,250
Expenses
Salary expense
252,100
Interest expense
75,000
Other expenses
8,150
Depreciation expense
25,000
Total expenses
360,250
Operating income
173,000
Income tax expense
43,000
Net income
$ 130,000
The following is additional information concerning Chapman’s transactions during the year ended May 31, 2010.
1. All sales during the year were made on account.
2. All merchandise was purchased on account, comprising the total accounts payable account.
3. Plant assets costing $98,000 were purchased by paying $28,000 in cash and issuing 7,000 shares of stock.
4. The “other expenses” are related to prepaid items.
5. All income taxes incurred during the year were paid during the year.
6. In order to supplement its cash, Chapman issued 2,000 shares of common stock at par value.
7. There were no penalties assessed for the retirement of bonds.
8. Cash dividends of $105,000 were declared and paid at the end of the fiscal year.
Instructions
(a)
Compare and contrast the direct method and the indirect method for reporting cash flows from operating activities.
(b)
Prepare a statement of cash flows for Chapman Company for the year ended May 31, 2010, using the direct method. Be sure to support the statement with appropriate calculations. (A reconciliation of net income to net cash provided is not required.)
(c)
Using the indirect method, calculate only the net cash flow from operating activities for Chapman Company for the year ended May 31, 2010.
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