Chpt 12 11
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11
INDIRECT METHOD STATEMENT OF CASH FLOW COMPREHENSIVE EXAMPLE
The following information is available for Magic Corporation for the year ended December 31, 20X7:
Collection of principal on long-term loan to a supplier $16,000
Acquisition of equipment for cash 10,000
Proceeds from the sale of long-term investment at book value 22,000
Issuance of common stock for cash 20,000
Depreciation expense 25,000
Redemption of bonds payable at carrying (book) value 34,000
Payment of cash dividends 6,000
Net income 30,000
Purchase of land by issuing bonds payable 40,000
In addition, the following information is available from the comparative balance sheet for Magic at the
end of 20X7 and 20X6:
20X7 20X6
Cash $148,000 $91,000
Accounts receivable (net) 25,000 15,000
Prepaid insurance 19,000 13,000
Total current assets $192,000 $119,000
Accounts payable $ 30,000 $19,000
Salaries and wages payable 6,000 7,000
Total current liabilities $ 36,000 $26,000
Instructions
Prepare Magic’s statement of cash flows for the year ended December 31, 20X7, using the indirect
method.
***Objective of the statement of cash flow will be to explain how cash increased by $57,000 from
$91,000 in 20X6 to $148,000 in 20X7. The next page shows the solution to the problem. Notice that the
cash from operating, investing, and financing activities sum up to that $57,000 difference in cash.
Also, the sum of cash from operating, investing, and financing activities + beginning cash equal the
current year’s cash balance on the balance sheet. This shows how the financial statements are
interrelated.