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Ch.

23 Statement of Cash Flow Example #1

The comparative balance sheets of Zeke Corporation at the beginning and end of year 2018 appear below.

Zeke Corporation
Balance Sheets

ASSETS Dec. 31 2018 Dec. 31, 2017 Inc./Dec.


Cash $10,500 $7,100 Inc. 3,400
Accounts receivable 18,000 9,400 Inc. 8,600
Prepaid expenses 2,700 3,200 Dec. 500
Investments -0- 11,300 Dec. 11,300
Equipment 56,000 42,000 Inc. 14,000
Less: Accumulated Depreciation (10,000) (5,000) Inc. 5,000
Total $77,200 $68,000 Inc. 9,200

LIABILITIES AND STOCKHOLDER’S


EQUITY
Accounts payable $4,900 $4,500 Inc. 400
Unearned revenue 1,700 6,000 Dec. 4,300
Common stock 14,000 10,000 Inc. 4,000
Retained Earnings 56,600 47,500 Inc. 9,100
Total $77,200 $68,000 Inc. 9,200

During the year 2018, Zeke purchased equipment for $14,000 cash, declared and paid cash dividends of $11,200, sold
investments for $19,000, and reported net income of $20,300.

Instructions
Prepare a statement of cash flows for Zeke Corporation for the year ending December 31, 2018.

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Solution:

Zeke Corporation
Statement of Cash Flows
For the Year ending 12/31/18

Cash flows from operating activities:


Net Income $20300
Adjustments to reconcile net income to net cash
provided by operating activities:
Increase in A/R (8600)
Decrease in prepaid expenses 500
Increase in A/P 400
Decrease in unearned revenue (4300)
Depreciation expense 5000
Gain on sale of investments (7700) (14700)
Net cash provided by operating activities 5600

Cash Flow s from Investing Activities:


Sale of investments 19000
Purchase of equipment (14000)
Net cash provided by investing activities 5000

Cash flows from financing activities:


Issuance of common stock 4000
Payment of cash dividends (11200)
Net cash used by financing activities (7200)

Net increase in cash 3400


Cash at beginning of year 7100
Cash at end of year 10500

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Ch. 23 Statement of Cash Flow Example #2
Zoe Inc. had the following balance sheet at December 31, 2017.
ZOE INC.
BALANCE SHEET
DECEMBER 31, 2017

Cash $20,000
Accounts receivable 21,200
Investments 32,000
Plant assets (net) 81,000
Land 40,000
$194,200
Accounts payable $30,000
Bonds payable 41,000
Common stock 100,000
Retained earnings 23,200
$194,200

During 2018 the following occurred.


1. Zoe liquidated its available-for-sale investment portfolio at a loss of $3,000.
2. A tract of land was purchased for $38,000.
3. An additional $26,000 in common stock was issued at par.
4. Dividends totaling $10,000 were declared and paid to stockholders.
5. Net income for 2018 was $35,000, including $12,000 in depreciation expense.
6. Land was purchased through the issuance of $30,000 in additional bonds.
7. At December 31, 2018, Cash was $66,200, Accounts Receivable was $42,000, and Accounts Payable was
$40,000.

Instructions
(a) Prepare a statement of cash flows for the year 2018 for Zoe.
(b) Prepare the balance sheet as it would appear at December 31, 2018.
(c) Computer Zoe’s free cash flow, the current cash debt coverage ratio and cash debt coverage ratio for 2018.
(d) Use the analysis of Zoe to illustrate how information in the balance sheet and statement flows helps the user
of the financial statements.

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Solution:

Current Cash Debt Coverage Ratio: Net Cash Provided by Operating ÷Average Current Liabilities
Current cash debt coverage is 1.12 to 1 (39200/*35000) (*35000 = (30000+40000)/2)
Cash Debt Coverage Ratio: Net Cash Provided by Operating Activities ÷Average Total Liabilities
39,200 ÷91,000 = .43 to 1 (Average total liabilities = (30,000 +41,000+40000+71,000) ÷2)

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