Other information is as follows Dividends of 60000 were decl

Other information is as follows: Dividends of $60,000 were declared and paid during the year. Operating expenses include $50,000 of depreciation. Land and plant and equipment were acquired for cash, and additional stock was issued cash. Cash also was received from additional bank loans. Prepare a statement of cash flows for 2014 using the direct method in the Operating Activities section. On the basis of your statement in part (1), draft a brief memo to the president to explain why cash decreased during such a profitable year. Include in your explanation any recommendations for improving the company\'s cash flow in future years. Refer to all of the facts in Problem 12-3.

Solution

(Problem 12-3)

(1) Statement of Cash Flows

NOTE: Out of 2 questions, the first question is answered.

CASH FLOW FROM OPERATING ACTIVITIES
	$
Net Income	2,25,000
Add: Depreciation	50,000
Add: Increase in Current Liabilities
Other Accrued Liabilities	5,000
Less: Increase in Current Assets
Accounts receivables	-50,000
Inventory	-30,000
Less: Decrease in Current Liabilities
Accounts Payable	-18,000
Income Tax Payable	-20,000
Add: Decrease in Current Assets
Prepayments	10,000
NET CASH FLOW FROM OPERATING ACTIVITIES (1)	1,72,000
CASH FLOW FROM INVESTING ACTIVITIES
	$
Acquisition of Land	-1,50,000
Acquisition of Plant & Machinery	-2,00,000
NET CASH FLOW FROM INVESTING ACTIVITIES (2)	-3,50,000
CASH FLOW FROM INVESTING ACTIVITIES
	$
Dividend Paid	-60,000
Increase in Long-Term Bank Loan	50,000
Increase in Common Stock	1,50,000
NET CASH FLOW FROM FINANCING ACTIVITIES (3)	1,40,000
NET CASH INFLOW/(OUTFLOW) DURING YEAR (1) + (2) + (3)	-38,000
Beginning Cash Balance (2013)	90,000
Ending Cash balance (2014)	52,000
NET CASH INFLOW/(OUTFLOW) DURING YEAR	-38,000