For the year ended December 31, 2005 Exercise 1 E.23.3. The income statement of Vince Gill Company is shown below : Vince Gill Company Income Statement For the year ended December 31, 2005 Sales $ 6,900,000 Cost of goods sold Beginning inventory $ 1,900,000 Purchases $ 4,400,000 Goods available for sale $ 6,300,000 Ending inventory $ 1,600,000 $ 4,700,000 Gross profit $ 2,200,000 Operating expenses Selling expenses $ 450,000 Administrative expenses $ 700,000 $ 1,150,000 Net Income $ 1,050,000 Additional information : Accounts receivable decreased $ 360,000 during the year Prepaid expenses increased $ 170,000 during the year Accounts payable to suppliers of merchandise decreased $ 275,000 during the year Accrued expenses payable decreased $ 100,000 during the year Administrative expenses include depreciation expense of $ 60,000 Instructions : Prepare the operating activities section of the statement of cash flows for the year ended December 31, 2005 for Vince Gill Company, using the indirect method

Partial Statement of Cash Flows For the Year Ended December 31, 2005 Answer of Exercise 1 Vince Gill Company  Partial Statement of Cash Flows  For the Year Ended December 31, 2005  Cash flows from operating activities  Net income $ 1,050,000  Adjustments to reconcile net income to net cash provided by operating activities:  Depreciation expense $ 60,000  Decrease in accounts receivable $ 360,000  Decrease in inventory $ 300,000  Increase in prepaid expenses $ (170,000) Decrease in accounts payable $ (275,000) Decrease in accrued expenses payable $ (100,000) $ 175,000  Net cash provided by operating activities $ 1,225,000 

Exercise 2 P.23.3. Mardi Gras Company has not yet prepared a formal statement of cash flows for the 2005 fiscal year. Comparative balance sheets as of December 31, 2004 and 2005, and a statement of income and retained earnings for the year ended December 31, 2005, are presented below : Mardi Gras Company Statement of Income and Retained Earnings Year ended December 31, 2005 ($ 000 omitted) Sales $ 3,800 Expenses : Cost of goods sold $ 1,200 Salaries and benefits $ 725 Heat, light and power $ 75 Depreciation $ 80 Property taxes $ 19 Patent amortization $ 25 Miscellaneous expenses $ 10 Interest $ 30_ $ 2,164 Income before income taxes $ 1,636 Income taxes $ 818 Net Income $ 818 Retained earnings Jan 1, 2005 $ 310 $ 1,128 Stock dividend declared and issued $ 600 Retained earnings Dec 31, 2005 $ 528

Comparative Balance Sheets Exercise 2 Mardi Gras Company Comparative Balance Sheets December 31 ($ 000 omitted) Assets 2005 2004 Current Assets : Cash $ 383 $ 100 US Treasury notes (available for sale) 0 50 Accounts Receivable 740 500 Inventory _ 720 _ 560 Total Current Assets $ 1,843 $ 1,210 Long Term Assets : Land $ 150 $ 70 Buildings and equipment 910 600 Accumulated depreciation (200) (120) Patents (less amortization) _ 105 _ 130 Total long term assets $ 965 $ 680 Total Assets $ 2,808 $ 1,890 Liabilities and Stockholders Equity Current Liabilities : Account Payable $ 420 $ 340 Income taxes payable 40 20 Notes payable _ 320 _ 320 Total current liabilities $ 780 $ 680 Long term note payable due 2007 $ 200 $ 200 Total liabilities $ 980 $ 880 Stockholders Equity : Common Stock $ 1,300 $ 700 Retained earnings _ 528 _ 310 Total Liabilities and Stockholders Equity $ 2,808 $ 1,890 Instructions : Prepare a statement of cash flows using the direct method. Changes in A/R and A/P relate to sales and cost of goods sold. Do not prepare a reconciliation schedule.

Statement Of Cash Flows For the Year Ended December 31, 2005 Answer of Exercise 2 Mardi Gras Company Statement Of Cash Flows For the Year Ended December 31, 2005 Cash flows from operating activities : Cash receipts from customers $ 3,560,000 (a) Payments for merchandise $ 1,280,000 (b) Salaries and benefits $ 725,000 Heat, light, and power $ 75,000 Property taxes $ 19,000 Interest $ 30,000 Miscellaneous $ 10,000 Income taxes $ 798,000 $ 2,937,000 (c) Net cash provided by operating activities $ 623,000 Cash flows from investing activities : Sale of available-for-sale investments $ 50,000 Purchase of buildings and equipment $ (310,000) Purchase of land $ (80,000) Net cash used by investing activities $ (340,000) Increase in cash $ 283,000 Cash, January 1, 2005 $ 100,000 Cash, December 31, 2005 $ 383,000

Answer of Exercise 2 Sales $ 3,800,000 Ending accounts receivable $ (740,000) $ 3,060,000 Beginning accounts receivable $ 500,000 Cash receipts (collections from customers) $ 3,560,000 Cost of goods sold $ 1,200,000 Ending inventory $ 720,000 Goods available for sale $ 1,920,000 Beginning inventory $ (560,000) Purchases $ 1,360,000 Ending accounts payable $ (420,000) $ 940,000 Beginning accounts payable $ 340,000 Cash purchases (payments for merchandise) $ 1,280,000 Income taxes $ 818,000 Ending taxes payables $ (40,000) $ 778,000 Beginning taxes payable $ 20,000 Income taxes (cash) $ 798,000