Problem Solving Survival Guide to accompany Financial Accounting, 8th Edition

EXERCISE 13-4

Purpose: (L.O. 3, 4) This exercise will provide you with an opportunity to prepare a statement of cash flows.

A comparative balance sheet for Hernan Perez Pictures appears below:

Additional information:

1. New equipment costing $80,000 was purchased for cash.
2. Old equipment was sold at a loss of $4,500.
3. Bonds were issued for cash.
4. An investment costing $30,000 was acquired by issuing a long-term note payable.
5. Cash dividends of $14,000 were declared and paid during the year.
6. Depreciation expense for 2014 was $15,000.
7. Accounts Payable relate to operating expenses.
8. Stock investments are classified as available-for-sale securities.
9. Net sales for 2014 were $80,000.

Instructions

(a) Prepare a statement of cash flows for 2014 using the indirect method.

(b) Compute the amount of free cash flow for 2014.

TIP: In this exercise, you must analyze the changes in the Retained Earnings account balance to determine the net income figure for 2014.