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statement of cash flows mdash direct method the table on page 267 shows the account 691930

Statement of Cash Flows—Direct Method

The table on page 267 shows the account balances of Novation, Inc., at the beginning and end of the company’s accounting period.

Debits

Dec 31, 2008

Jan 1, 2008

Cash and Cash Equivalents                                  

$176,400

$ 58,000

Accounts Receivable                                      

32,000

26,600

Inventory                                              

21,000

25,400

Prepaid Insurance                                        

5,600

4,000

Long Term Investments (at cost)                             

6,000

16,800

Equipment                                             

80,000

66,000

Treasury Stock (at cost)                                   

10,000

20,000

Cost of Goods Sold                                      

368,000

 

Operating Expenses                                      

185,000

 

Income Tax Expense                                      

37,600

 

Loss on Sale of Equipment                                  

1,000 

 

Total debits                                         

$922,600

$216,800

 

Credits

Dec 31, 2008

Jan 1, 2008

Accumulated Depreciation—Equipment                        

$ 19,000

$ 18,000

Accounts Payable                                        

7,000

11,200

Interest Payable                                         

1,000

2,000

Income Taxes Payable                                     

12,000

8,000

Notes Payable—Long Term                                 

16,000

24,000

Common Stock                                         

110,000

100,000

Paid In Capital in Excess of Par                              

32,000

30,000

Retained Earnings                                         

19,600*

23,600

Sales                                                 

704,000

 

Gain on Sale of Long Term Investments                        

2,000 

 

Total credits                                         

$922,600

$216,800

The following additional information is available:

(a) All purchases and sales were on account.

(b) Equipment costing $10,000 was sold for $3,000; a loss of $1,000 was recognized on the sale.

(c) Among other items, the operating expenses included depreciation expense of $7,000; interest expense of $2,800; and insurance expense of $2,400.

(d) Equipment was purchased during the year by issuing common stock and by paying the balance ($12,000) in cash.

(e) Treasury stock was sold for $4,000 less than it cost; the decrease in owners’ equity was recorded by reducing Retained Earnings. No dividends were paid during the year.

Instructions:

1. Prepare a statement of cash flows for the year ended December 31, 2008, using the direct method of reporting cash flows from operating activities.

2. Comment on the lack of dividend payment. Does a “no dividend” policy seem appropriate under the current circumstances for Novations, Inc.?

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