How to Solve Cash Flow Statement Problems

How to Solve this Cash Flow Statement problem
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"Fred Slezak presented the following comparative balance sheet:
"
FRED SLEZAK CORPORATION
Comparative Balance Sheet
December 31, 2005 and 2004

ASSETS 2005 2004
Current assets
Cash $664,000 $9,000
Accounts receivable 375,000 345,000
Inventories 150,000 160,000
Prepaid expenses 35,000 25,000
Total current assets $1,224,000 $539,000
Property, plant & equip.
Land $300,000 $400,000
Building 700,000 700,000
Equipment 530,000 450,000
$1,530,000 $1,550,000
Less: Accumulated depreciation (300,000) (270,000)
Total property, plant & equipment $1,230,000 $1,280,000
Total assets $2,454,000 $1,819,000

LIABILITIES
Current liabilities
Accounts payable $112,000 $119,000
Interest payable 2,000 -Nil
Total current liabilities $114,000 $119,000
Long-term liabilities
Long-term note payable 80,000 -Nil
Total liabilities $194,000 $119,000

STOCKHOLDERS' EQUITY

Common stock ($1 par) $700,000 $600,000
Paid-in capital in excess of par 800,000 400,000
Retained earnings 760,000 700,000
Total stockholders' equity $2,260,000 $1,700,000
Total Liabilities and equity $2,454,000 $1,819,000

Additional information about transactions and events occurring in 2005 follows:

Dividends of $55,000 were declared and paid.

Accounts payable and accounts receivable relate solely to purchases and sales of inventory. Prepaid items related only to advertising expenses.

The decrease in land resulted from the sale of a parcel at a $45,000 loss. No land was purchased during the year. Equipment was purchased during the year in exchange for a promissory note payable. No equipment was sold.

The increase in paid-in capital resulted from issuing additional shares for cash.

The income statement for the year ending December 31, 2005, included the following key amounts:
Sales $2,000,000
Cost of goods sold 1,200,000
Salaries expense 400,000
Advertising expense 150,000
Depreciation expense 30,000
Utilities expense 15,000
Interest expense 5,000
Loss on sale of land 45,000
Income tax expense 40,000
Net income 115,000

Prepare Fred Slezak's statement of cash flows for the year ending 2005. Use the indirect approach, and include required supplemental information about cash paid for interest and taxes.

Suraj Rana from India 

Suraj Rana! First of all your thanks for writing and sending this question in accounting education. Actual this question or any other cash flow statement questions are so easy if we know its correct process. I think in your book, there may 20 or 25 questions just relating to this but changing of figures. This cash flow statement is compulsory for every company. It means, it will not be benefited just solve this question but to tell the complete procedure of making it is useful for you because in future, you will become corporate accountant and to make these type of cash flow statement will be the part of your duty.

As per indirect method, what is cash flow statement

Cash flow statement 

Cash from operation + cash from investment + cash from financing  + opening balance of cash = closing balance of cash 

opening and closing balance is already given, now you will just know following figure


1st Step : To know Cash from operation 

It means we are interested what amount of net profit in the form of cash from business operation.


For this take,  net profit  or net income as per above given

Add :  Non - cash and  non- operating expenses and losses. You can learn its list at here.

Deduct :  Non- cash and non operating incomes from what balance will we receive after adding above. You can learn list of these incomes at here.

Add : decrease in current asset and increase in current liabilities after comparing two years figures. You can learn list of these items at here.

Deduct : Increase in current assets and decrease in current liabilities after comparing two years figures. you can learn list of these items at here.

Deduct : Income Tax paid


2nd Step : To know cash from investment 

In this section, we compare cash inflow and cash outflow of investment activities.

Inflow of cash 

a) Sale of fixed assets

b) Dividend received
c) interest received


Less Outflow of cash 

Cost of purchase of fixed assets

3rd Step : To know cash from financing 

In this section, we compare cash inflow and cash outflow of financing activities.

Inflow of cash

a) New  issue of shares
b) New issue of debentures

Outflow of cash

a) Redemption of pref. shares
b) Redemption of debentures
c) Dividend paid
d) Interest paid

Read our solved example with indirect and direct method of preparing cash flow statement at here. Read the form of  cash flow statement with indirect method at here.