The Glass Factory, Inc. has just ended the 2012 production year. The balance sheet and income statement are presented below. Two of the four key financial statements remain to be prepared for the stockholders’ report. Balance Sheet Glass Factory, Inc. December 31, 2011 and 2012 2012 2011 Assets Cash $1,000 $ 500 Accounts receivable 5,000 4,500 Inventory 7,000 6,000 Gross fixed assets $20,000 $15,000 Accumulated depreciation 10,000 9,000 Net fixed assets $10,000 $ 6,000 $17.000 Total assets $23.000 Liabilities and stockholders’ equity Accounts payable $ 2,000 $ 1,500 Notes payable 3,000 2,500 Accruals 500 500 Long-term debt 10,000 6,000 Common stock at par 500 500 Paid-in capital in excess of par 5,500 5,500 Retained earnings 1,500 500 Total liabilities and stockholders’ equity $23,000 $17,000 Income Statement Glass Factory, Inc. for the Year Ended December 31, 2012 Sales Cost of goods sold $40,000 21,000 Gross profits $10,000 Operating expenses 13,000 Operating profits $ 6,000 Interest expense 2,000 Net profits before taxes $ 4,000 Taxes (40%) 1,600 Net Income after taxes $ 2.400 Required: a. Calculate the amount of cash dividends paid during 2012. b. Calculate the depreciation expense incurred during 2012. c. Prepare a statement of retained earnings for the year ended December 31, 2012. d. Prepare the statement of cash flows for the year ended December 31, 2012.

Get full solution in 10 Seconds

EXPERT ANSWER

(a) We will calculate the dividends by the following equation:

Ending balance of retained earnings = Beginning balance of retained earnings + Net income – Dividends paid

$1500 = $500 + $2400 – Dividends paid

Dividends paid = $500 + $2400 – $1500

Dividends paid = $1400

(b) Accumulated depreciation represents the depreciation charged till date. So, we will calculate the depreciation expense for 2012 as per below:

Depreciation expense = Accumulated depreciation in 2012 – Accumulated depreciation in 2011

Depreciation expense = $10000 – $9000 = $1000

(c) Statement of retained earnings for the year ended December 31, 2012

Beginning balance $500

Add: Net income $2400

Less: Dividends paid ($1400)   

Ending balance $1500

(d) In calculating the cash flows statement from indirect method, we will start with the net income. We will add back the non cash item of depreciation in it. Then we will adjust the amount for increase or decrease in cash due to increase or decrease in current assets or current liabilities.Like, an increase in current assets will reduce cash, so we will deduct it and a decrease in current assets will increase cash, so we will add it. Similarly, an increase in current liabilities will increase cash, so it will be added and a decrease in current liabilities will reduce cash, so it will be deducted.

Statement of cash flows for the year ended December 31, 2012 :

Net income $2400

Add: Depreciation $1000

Less: Increase in accounts receivable ($500)

Less: Increase in inventory    ($1000)

Add: Increase in accounts payable $500

Add: Increase in notes payable $500

Cash from operating activities $2900

Purchase of fixed assets ($5000)

Cash from investing activities ($5000)

Issue of long term debt $4000

Dividends paid ($1400)

Cash from financing activities $2600

Net cash provided by operating

investing and financing activities $500

Beginning cash balance $500

Ending cash balance $1000