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11 February, 08:11

On the basis of the following data for Garrett Co. for Years 1 and 2 ended December 31, prepare a statement of cash flows using the indirect method of reporting cash flows from operating activities. Assume that equipment costing $125,000 was purchased for cash and equipment costing $85,000 with accumulated depreciation of $65,000 was sold for $15,000; that the stock was issued for cash; and that the only entries in the retained earnings account were for net income of $56,000 and cash dividends declared of $18,000.

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  1. 11 February, 09:14
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    Garrett Co. cash flows from operating activities is $61,000.

    Explanation:

    Garrett Co.

    Statement of cash flows (extract)

    Net income $56,000

    Add Loss on disposal of equipment 5,000

    Cash flows from operating activities $61,000

    Loss on disposal of the equipment was calculated as Proceeds - net book value, that is $15,000 - $20,000.

    Note that purchase of equipment belongs to investing part of the cash flows while proceed from stock issuance and dividend payment belong to financing part of the cash flows
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