P23-7 (SCF—Direct and Indirect Methods from Comparative Financial Statements) Chapman

Company,a major retailer of bicycles and accessories, operates several stores and is a publicly traded
company.The comparative balance sheet and income statement for Chapman as of May 31, 2012, are
shown on thenext page. The company is preparing its statement of cash flows.

CHAPMAN COMPANY
COMPARATIVE BALANCE SHEET
AS OF MAY 31
2012 2011
Current assets
Cash $ 28,250 $ 20,000
Accounts receivable 75,000 58,000
Inventory 220,000 250,000
Prepaid expenses 9,000 7,000
Total current assets 332,250 335,000

Plant assets
Plant assets 600,000 502,000
Less: Accumulated
Depreciation—plant assets 150,000 125,000
Net plant assets 450,000 377,000
Total assets $782,250 $712,000

Current liabilities
Accounts payable $123,000 $115,000
Salaries and wages payable 47,250 72,000
Interest payable 27,000 25,000
Total current liabilities 197,250 212,000

Long-term debt
Bonds payable 70,000 100,000
Total liabilities 267,250 312,000

Stockholders’ equity
Common stock, $10 par 370,000 280,000
Retained earnings 145,000 120,000
Total stockholders’ equity 515,000 400,000

Total liabilities and stockholders’ equity $782,250 $712,000

CHAPMAN COMPANY
INCOME STATEMENT
FOR THE YEAR ENDED MAY 31, 2012
Sales $1,255,250
Cost of goods sold 722,000
Gross profit 533,250
Expenses
Salaries and wages expense 252,100
Interest expense 75,000
Depreciation expense 25,000
Other expenses 8,150
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
endedMay 31, 2012.
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 ofstock.
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. Cash dividends of $105,000 were declared and paid at the end of the fiscal year.

Instructions
Prepare a statement of cash flows for Chapman Company for the year ended May 31, 2012, usingthe
direct method. Be sure to support the statement with appropriate calculations. (A reconciliationof net
income to net cash provided is not required.)
 CHAPMAN COMPANY
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED MAY 31, 2012

Cash flows from operating activities

Cash received from customers $1,247,000
Cash Payments:
To Suppliers $ 667,250
For operating expenses $ 362,250
For income taxes $ 43,000 $1,072,500
Net Cash provided by operating expenses $ 174,500

Cash Received from Customers during the year.

Opening Receivable 58000 $

+Sales during the year 1255250 $
-Closing Receivable 75000 $
Cash Received 1238250 this is correct Method and Answer.

Cash received from customers:

Sales 1,255,250
Increase in cash 8,250
1,247,000

Cash to suppliers:
Cost of goods sold 722,000
Subt change in inventory 30,000
Sub change in Accts Pay 24,750
$667,250

Cash for operating expenses:

Total expenses 360,250
Add incr prepaid exp 2,000
Total 362,250

Income tax expense is self-explanatory

Does direct method only include operating expenses? NO