Chapman Company, a major retailer of bicycles and accessories,
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.
COMPARATIVE STATEMENT OF FINANCIAL POSITION
AS OF MAY 31
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 600,000 502,000
Less: Accumulated depreciation 150,000 125,000
Net plant assets 450,000 377,000
Total assets $782,250 $712,000
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
Bonds payable 70,000 100,000
Total liabilities 267,250 312,000
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
FOR THE YEAR ENDED MAY 31, 2010
Cost of merchandise sold 722,000
Gross profit 533,250
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.
(a)Compare and contrast the direct method and the indirect method for reporting cash flows from operating activities.
GAAP required using direct and indirect method to prepare the statement of cash flows report but under FASB proposed of financial statement would utilization of the direct method rather than the indirect method for calculating cash flows.
(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