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)
Salaries Payable
Notes Payable
Total Liabilities
Stockholders’ Equity
Common Stock, $10 Par Value
Retained Earnings
Total Stockholders’ Equity
Total Liabilities and Equity
$ 6,000
9,000
20,000
35,000
$ 8,000
4,000
14,000
26,000
18,000
7,000
25,000
$60,000
25,000
17,000
42,000
$68,000
Income Statement
For the Year Ended December 31, 2008
Sales
Cost of Goods Sold
Gross Profit
Salaries Expense
Depreciation Expense
Operating Income
Gain on Sale of Equipment
Net Income
$98,000
62,000
$36,000
(14,000)
(10,000)
$12,000
3,000
$15,000
Other information:
1. During 2008, Hunt sold equipment that cost $6,000 for $4,000.
depreciation at the time of the sale was $5,000.
2. During 2008, Hunt paid cash dividends of $5,000 to stockholders.
Accumulated
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
Accounts
a. Work Paper
T-
T-Accounts
Cash
Bal. 2,000
Operating Activities
Investing Activities
Accounts Payable
Common Stock
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
Net Decrease in Cash
Beginning Cash Balance
Ending Cash Balance
(4,000)
$(1,000)