1. Waterways sold a piece of company equipment for $24,000. The equipment had been used for ten years. It had cost $80,000 when purchases and had a 10-years life and a $6,000 salvage value. Straight-line depreciation was used.
2. Waterways purchased new equipment costing $209,200.
3. The division paid $50,000 in dividends.
Waterways Corporation - Installation Division
Income Statement
For the year ending December 31
Sales
$5,536,077
Less: Cost of goods sold
3,132,777
Gross Profit
2,403,300
Operating expenses:
Advertising
$50,000
Insurance
400,000
Salaries and wages
584,640
Depreciation
71,319
Other operating expenses
21,200
Total operating expenses
1,127,159
Income from operations
1,276,141
Other income
Gain on sale of equip
18,000
Other expenses
Interest expense
(12,187)
Net other income and expenses
5,813
Income before income tax
1,281,954
Income tax expenses
384,586
Net income
$897,368
Waterways Corporation - Installation Division
Balance Sheet
December 31
Assets
This Year
Last Year
Current assets
Cash
$786,797
$746,681
Accounts receivable
680,750
542,685
Work in process
702,159
0
Inventory
16,766
7,500
Prepaid expenses
76,550
42,590
Total current assets
2,263,022
1,339,456
Property, plant, and equipment
Furnishings
40,416
40,416
Equipment
929,400
800,200
Buildings
450,000
450,000
Land
300,000
300,000
Accumulated depreciation
(482,523)
(485,204)
Total property, plant, and
equipment
1,237,293
1,105,412
Total Assets
$3,500,315
$2,444,868
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable
$157,095
$128,360
Income taxes payable
101,344
79,989
Wages payable
4,517
1,984
Interest payable
1,187
0
Other current liabilities
14,515
15,246
Revolving bank loan payable
15,000
0
Total current liabilities
293,658
225,579
Long-term liabilities
Notes payable
140,000
0
Total liabilities
433,658
225,579
Stockholders' equity
Common stock
1,250,000
1,250,000
Retained earnings
1,816,657
969,289
Total stockholders' equity
3,066,657
2,219,289
Total liabilities and stockholders' equity
$3,500,315
$2,444,868
Instructions:
a. Prepare a statement of cash flow using the indirect method for this year.
b. Determine free cash flow.
1. Waterways sold a piece of company equipment for $24,000. The equipment had been used for ten years. It had cost $80,000 when purchases and had a 10-years life and a $6,000 salvage value. Straight-line depreciation was used.
2. Waterways purchased new equipment costing $209,200.
3. The division paid $50,000 in dividends.
| Waterways Corporation - Installation Division | |||
| Income Statement | |||
| For the year ending December 31 | |||
| Sales | $5,536,077 | ||
| Less: Cost of goods sold | 3,132,777 | ||
| Gross Profit | 2,403,300 | ||
| Operating expenses: | |||
| Advertising | $50,000 | ||
| Insurance | 400,000 | ||
| Salaries and wages | 584,640 | ||
| Depreciation | 71,319 | ||
| Other operating expenses | 21,200 | ||
| Total operating expenses | 1,127,159 | ||
| Income from operations | 1,276,141 | ||
| Other income | |||
| Gain on sale of equip | 18,000 | ||
| Other expenses | |||
| Interest expense | (12,187) | ||
| Net other income and expenses | 5,813 | ||
| Income before income tax | 1,281,954 | ||
| Income tax expenses | 384,586 | ||
| Net income | $897,368 | ||
| Waterways Corporation - Installation Division | ||||
| Balance Sheet | ||||
| December 31 | ||||
| Assets | This Year | Last Year | ||
| Current assets | ||||
| Cash | $786,797 | $746,681 | ||
| Accounts receivable | 680,750 | 542,685 | ||
| Work in process | 702,159 | 0 | ||
| Inventory | 16,766 | 7,500 | ||
| Prepaid expenses | 76,550 | 42,590 | ||
| Total current assets | 2,263,022 | 1,339,456 | ||
| Property, plant, and equipment | ||||
| Furnishings | 40,416 | 40,416 | ||
| Equipment | 929,400 | 800,200 | ||
| Buildings | 450,000 | 450,000 | ||
| Land | 300,000 | 300,000 | ||
| Accumulated depreciation | (482,523) | (485,204) | ||
| Total property, plant, and equipment | 1,237,293 | 1,105,412 | ||
| Total Assets | $3,500,315 | $2,444,868 | ||
| Liabilities and Stockholders' Equity | ||||
| Current liabilities | ||||
| Accounts payable | $157,095 | $128,360 | ||
| Income taxes payable | 101,344 | 79,989 | ||
| Wages payable | 4,517 | 1,984 | ||
| Interest payable | 1,187 | 0 | ||
| Other current liabilities | 14,515 | 15,246 | ||
| Revolving bank loan payable | 15,000 | 0 | ||
| Total current liabilities | 293,658 | 225,579 | ||
| Long-term liabilities | ||||
| Notes payable | 140,000 | 0 | ||
| Total liabilities | 433,658 | 225,579 | ||
| Stockholders' equity | ||||
| Common stock | 1,250,000 | 1,250,000 | ||
| Retained earnings | 1,816,657 | 969,289 | ||
| Total stockholders' equity | 3,066,657 | 2,219,289 | ||
| Total liabilities and stockholders' equity | $3,500,315 | $2,444,868 | ||
Instructions:
a. Prepare a statement of cash flow using the indirect method for this year.
b. Determine free cash flow.
Related questions
Waterways prepared the balance sheet and income statement forthe irrigation installation division for last year. Now the companyneeds to prepare a cash flow statement for the same division. Thecomparative balance sheets for Waterways Corporationâs IrrigationInstallation Division for last year and the prior year and theincome statement for last year are presented below. (Note: Work inProcess is a current asset and should be treated as any othercurrent asset.)
Additional information:
1. Waterways sold a piece of company equipment for $30,000. Theequipment had been used for six years. It had cost $100,000 whenpurchases and had a 10-years life and a $10,000 salvage value.Straight-line depreciation was used.
2. Waterways purchased new equipment costing $200,000.
3. The division paid $100,000 in dividends.
Waterways Corporation - Installation Division | |||
Income Statement | |||
For the Year Ending December 31, Last Year | |||
Sales | $5,536,077 | ||
Less: Cost of goods sold | 3,132,777 | ||
Gross Profit | 2,403,300 | ||
Operating expenses: | |||
Advertising | $52,000 | ||
Insurance | 382,000 | ||
Salaries and wages | 594,650 | ||
Depreciation | 72,500 | ||
Other operating expenses | 30,500 | ||
Total operating expenses | 1,131,650 | ||
Income from operations | 1,271,650 | ||
Other income | |||
Loss on sale of equip | (16,000) | ||
Other expenses | |||
Interest expense | (12,200) | ||
Net other income and expenses | (28,200) | ||
Income before income tax | 1,243,450 | ||
Income tax expenses | 373,035 | ||
Net income | $870,415 | ||
Waterways Corporation - Installation Division | ||||
Balance Sheet | ||||
December 31 | ||||
Assets | Last Year | Prior Year | ||
Current assets | ||||
Cash | $792,306 | $746,681 | ||
Accounts receivable | 680,750 | 542,685 | ||
Work in process | 680,450 | 0 | ||
Inventory | 16,750 | 7,500 | ||
Prepaid expenses | 71,500 | 42,590 | ||
Total current assets | 2,241,756 | 1,339,456 | ||
Property, plant, and equipment | ||||
Furnishings | 40,416 | 40,416 | ||
Equipment | 900,200 | 800,200 | ||
Buildings | 450,000 | 450,000 | ||
Land | 300,000 | 300,000 | ||
Accumulated depreciation | (503,704) | (485,204) | ||
| Total property, plant, and equipment | 1,186,912 | 1,105,412 | ||
Total Assets | $3,428,668 | $2,444,868 | ||
Liabilities and Stockholders' Equity | ||||
Current liabilities | ||||
Accounts payable | $156,300 | $128,360 | ||
Income taxes payable | 100,344 | 79,989 | ||
Wages payable | 600 | 1,984 | ||
Interest payable | 1,200 | 0 | ||
Other current liabilities | 14,520 | 15,246 | ||
Revolving bank loan payable | 16,000 | 0 | ||
Total current liabilities | 288,964 | 225,579 | ||
Long-term liabilities | ||||
Notes payable | 150,000 | 0 | ||
Total liabilities | 438,964 | 225,579 | ||
Stockholders' equity | ||||
Common stock | 1,250,000 | 1,250,000 | ||
Retained earnings | 1,739,704 | 969,289 | ||
Total stockholders' equity | 2,989,704 | 2,219,289 | ||
Total liabilities and stockholders' equity | $3,428,668 | $2,444,868 | ||
Instructions:
For last year:
a. Prepare a statement of cash flowusing the indirect method.
b. Determine free cash flow.
Style, Inc. operates three stores in a large metropolitan area. The companyâs segmented absorption costing income statement for the last quarter follows:
| Style, Inc. | ||||
| Income Statement | ||||
| For the Quarter Ended March 31 | ||||
| Total | Uptown Store | Downtown Store | Eastpark Store | |
| Sales | $ 2,500,000 | $ 900,000 | $ 750,000 | $ 1,000,000 |
| Cost of goods sold | 1,450,000 | 513,000 | 522,000 | 565,000 |
| Gross margin | $ 1,050,000 | $ 387,000 | $ 228,000 | $ 435,000 |
| Selling and administrative expenses: | ||||
| Selling expenses: | ||||
| Direct advertising | 118,500 | 40,000 | 36,000 | 42,500 |
| General advertising | 20,000 | 7,200 | 4,800 | 8,000 |
| Sales salaries | 157,000 | 52,000 | 45,000 | 60,000 |
| Delivery salaries | 30,000 | 10,000 | 10,000 | 10,000 |
| Store rent | 215,000 | 70,000 | 60,000 | 80,000 |
| Depreciation of store fixtures | 46,950 | 18,300 | 8,800 | 19,850 |
| Depreciation of delivery equipment | 27,000 | 9,000 | 9,000 | 9,000 |
| Total selling expenses | 614,450 | 206,500 | 173,600 | 229,350 |
| Administrative expenses: | ||||
| Store management salaries | 63,000 | 20,000 | 18,000 | 25,000 |
| General office salaries | 50,000 | 18,000 | 12,000 | 20,000 |
| Utilities | 89,800 | 31,000 | 27,200 | 31,600 |
| Insurance on fixtures and inventory | 25,500 | 8,000 | 9,000 | 8,500 |
| Employment taxes | 36,000 | 12,000 | 10,200 | 13,800 |
| General office expenses-other | 25,000 | 9,000 | 6,000 | 10,000 |
| Total administrative expenses | 289,300 | 98,000 | 82,400 | 108,900 |
| Total operating expenses | 903,750 | 304,500 | 261,000 | 338,250 |
| Net operating income (loss) | $ 146,250 | $ 82,500 | $ (28,000) | $ 96,750 |
| Additional Data: | ||||
| Manager's salary per quarter | $ 18,000 | |||
| New employee's salary per month | $ 5,000 | |||
| Employment tax as a percentage of salaries | 12% | |||
| Delivery person's salary per quarter | $ 7,000 | |||
| Insurance related to downtown fixtures | 1/3 | |||
| Discharged employee's salary per quarter | $ 8,000 | |||
| Assumed sales transferred to Uptown store | $ 200,000 | |||
| Uptown store gross margin percentage | 43% | |||
Management is very concerned about the Downtown storeâs inability to show a profit, and consideration is being given to closing the store. The company has asked you to make a recommendation as to what course of action should be taken. The following additional information is available about the store:
a. The manager of the store has been with the company for many years, he would be retained and transferred to another position in the company if the store were closed. His salary is $6,000 per month, or $18,000 per quarter. If the store were not closed, a new employee would be hired to fill the other position at a salary of $5,000 per month.
b. The lease on the building housing the Downtown Store can be broken with no penalty.
c. The fixtures being used in the Downtown Store would be transferred to the other two stores if the Downtown Store were closed.
d. The companyâs employment taxes are 12% of salaries.
e. A single delivery crew serves all three stores. One delivery person could be discharged if the Downtown Store were closed; this personâs salary amounts to $7,000 per quarter. The delivery equipment would be distributed to the other stores. The equipment does not wear out through use, but it does eventually become obsolete.
f. One-third of the Downtown Storeâs insurance relates to its fixtures.
g. The general office salaries and other expenses relate to the general management of Style, Inc. The employee in the general office who is responsible for the Downtown Store would be discharged if the store were closed. This employeeâs compensation is $8,000 per quarter.
Required (USE EXCEL):
1. Prepare a schedule showing the change in revenues and expenses and the impact on the overall company net operating income that would result if the Downtown Store were closed.
2. Based on your computations in (1) above, what recommendation would you make to the management of Style, Inc.?
3. Assume that if the Downtown Store were closed, sales in the Uptown Store would increase by $200,000 per quarter due to loyal customers shifting their buying to the Uptown Store. The Uptown Store has ample capacity to handle the increased sales, and its grow margin is 43% of sales. What effect would these factors have on your recommendation concerning the Downtown Store? Show computations in Excel.
