$84,000 of Profit and $4,000 More Cash: Building a Commercial Print Shop's Statement of Cash Flows by the Indirect Method From Two Balance Sheets, One Income Statement and the Sale of an Old Press
[Student Name]
University of Phoenix
ACC/291: Principles of Accounting II
Week 4 Assignment
[Instructor Name]
[Date]
The business and all figures are a composite written for a model paper.
A composite commercial print shop, organized as a corporation, produces brochures, menus, signs and direct-mail pieces for restaurants, real estate offices and local nonprofits. This year it replaced two aging offset presses with one digital press that handles short runs more cheaply. The shop reported net income of $84,000, yet its bank balance rose only from $31,000 to $35,000. The owners asked a fair question: if the shop earned $84,000, where did the other $80,000 go? The statement of cash flows answers it by sorting every source and use of cash into operating, investing and financing activities (Weygandt et al., 2021).
The Information Available
The comparative balance sheets show these changes from last December 31 to this one. Cash, $31,000 to $35,000. Accounts receivable, $52,000 to $66,000. Paper and ink inventory, $38,000 to $32,000. Prepaid expenses, $5,000 to $7,000. Equipment, $400,000 to $540,000. Accumulated depreciation, $160,000 to $178,000. Accounts payable, $21,000 to $30,000. Accrued wages, $12,000 to $8,000. Income taxes payable, $6,000 to $7,000. Notes payable to the bank, $120,000 to $190,000. Common stock, unchanged at $100,000. Retained earnings, $107,000 to $167,000. Total assets rose from $366,000 to $502,000, and total liabilities and equity match both years.
The income statement reports net income of $84,000 after depreciation expense of $46,000 and a $3,000 loss on the sale of equipment. The records add three facts: the shop sold an old press that had cost $40,000, with accumulated depreciation of $28,000, for $9,000 in cash; it bought the new press for $180,000 in cash; and it paid $24,000 of dividends.
Step 1: Reconcile the Equipment Accounts
Changes in the long-lived asset accounts must be explained before they are used. Equipment began at $400,000, lost the $40,000 old press and gained the $180,000 new one, ending at $540,000. Accumulated depreciation began at $160,000, lost the old press's $28,000 and gained this year's $46,000 of depreciation, ending at $178,000. Both accounts reconcile, which confirms that no other purchase or sale is hiding in the numbers.
The old press had a book value of $12,000, cost of $40,000 less $28,000, and sold for $9,000, a loss of $3,000.
Step 2: Operating Activities
The indirect method starts with net income and adjusts it to the cash that operations produced.
Net income: $84,000.
Add depreciation, a noncash expense: $46,000.
Add the loss on the sale of equipment, because the whole $9,000 of proceeds will be reported under investing: $3,000.
Subtract the $14,000 increase in accounts receivable: sales were recorded as revenue but not yet collected.
Add the $6,000 decrease in inventory: paper and ink bought last year were used this year without new cash.
Subtract the $2,000 increase in prepaid expenses: cash was paid ahead for costs of next year.
Add the $9,000 increase in accounts payable: expenses were recorded but suppliers were not yet paid.
Subtract the $4,000 decrease in accrued wages: the shop paid more wages in cash than it recorded as expense this year.
Add the $1,000 increase in income taxes payable.
Net cash provided by operating activities is $129,000.
Step 3: Investing Activities
Purchase of the digital press: cash used, $180,000. Sale of the old press: cash received, $9,000. Net cash used by investing activities is $171,000.
Step 4: Financing Activities
The notes payable account rose by $70,000, but that net figure hides two transactions, and both must be shown. The bank lent the shop $100,000 toward the new press, and the shop repaid $30,000 of the older loan. Dividends paid were $24,000, which also explains the change in retained earnings: $107,000 plus net income of $84,000 minus dividends of $24,000 equals $167,000. Net cash provided by financing activities is $100,000 minus $30,000 minus $24,000, or $46,000.
Step 5: Prove the Change in Cash
Operating activities provided $129,000, investing used $171,000 and financing provided $46,000. The net increase is $4,000, and cash of $31,000 at the start of the year plus $4,000 equals $35,000, the figure on this year's balance sheet. The statement is complete.
What the Statement Tells the Owners
The answer to the owners' question is now clear. Operations produced $129,000 of cash, more than net income, mostly because depreciation of $46,000 was an expense that used no cash this year. The shop then spent $180,000 on the new press, more than operations produced, and covered the gap with a new bank loan. Free cash flow, operating cash flow minus capital spending, was negative $51,000 this year, which is normal in a year of major equipment replacement but could not continue for long.
Two operating details deserve attention. Receivables rose by $14,000, a 27% increase in one year; unless sales grew just as fast, customers are taking longer to pay. And accounts payable rose by $9,000, meaning part of this year's operating cash came from paying suppliers later. Neither is a problem yet, but both would flatter operating cash flow if they continued.
These details matter because the parts of earnings that differ from cash carry information of their own. Barth et al. (2001) found that the separate accrual components, such as changes in receivables, inventory and payables and depreciation, helped predict future cash flows beyond what current cash flow alone could predict. The statement is also the right source for these components. Hribar and Collins (2002) showed that estimating accruals from changes in balance sheet accounts, rather than from the cash flow statement, produces errors whenever a company buys or sells a business or has other nonoperating events, which is one reason the statement itself is worth preparing carefully.
Conclusion
The print shop earned $84,000 and generated $129,000 from operations, but it invested $171,000 in equipment and relied on a net $46,000 of financing, so its cash rose only $4,000. Building the statement from two balance sheets and an income statement required reconciling the equipment accounts, adjusting net income for noncash items and working capital changes, and showing borrowing and repayment separately. The finished statement tells the owners where the money went and warns them to watch the growing receivables before the next large purchase.
References
Barth, M. E., Cram, D. P., & Nelson, K. K. (2001). Accruals and the prediction of future cash flows. The Accounting Review, 76(1), 27-58. https://doi.org/10.2308/accr.2001.76.1.27
Hribar, P., & Collins, D. W. (2002). Errors in estimating accruals: Implications for empirical research. Journal of Accounting Research, 40(1), 105-134. https://doi.org/10.1111/1475-679X.00041
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2021). Accounting principles (14th ed.). Wiley.
How this ACC 291 Week 4 example is structured
The ACC/291 shelf page describes Week 4 as reaching the statement of cash flows and how it is built. The paper starts from the raw materials an accountant actually has, two balance sheets and an income statement, and works through operating, investing and financing activities in order. It treats the equipment sale in detail, because a loss on disposal is the adjustment students most often put in the wrong section, and it closes by reading the finished statement. Students search this week as ACC 291 Week 4, ACC291 Wk 4 or ACC/291 Wk 4; all three are the same assignment.
ACC/291 Week 4 questions, answered
What does ACC/291 Week 4 usually ask for?
The ACC/291 shelf describes Week 4 as reaching the statement of cash flows and how it is built. Many sections assign a problem that prepares the statement by the indirect method from comparative balance sheets and an income statement, with a short interpretation.
Why is depreciation added back to net income?
Depreciation reduced net income but used no cash in the period; the cash left when the equipment was bought, and that payment appeared under investing activities in the year of purchase. Adding it back removes a noncash expense from the operating figure.
Where does the sale of equipment go?
The cash received goes in investing activities. Any gain or loss on the sale is removed from net income in the operating section, a loss added back and a gain subtracted, so that the proceeds are not counted twice or in the wrong place.
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