Question:
PXE Company shown the following comparative balance sheets at December 31, 2005 and 2006, and the income statement for the year ended December 31, 2006:
PXE Company
Balance Sheets
December 31, 2006 and 2005
December 31, 2006 December 31, 2005
Assets
Cash $ 12,200 $ 28,200
Accounts receivable 16,000 18,000
Inventory 19,500 22,000
Prepaid rent 200 300
Total current assets $ 47,900 $ 68,500
Land 58,000 30,000
Equipment 65,000 60,000
Accumulated depreciation (11,000) (4,000)
Total assets $159,900 $154,500
Liabilities and stockholders' equity
Accounts payable $ 13,000 $ 25,000
Salaries payable 2,000 2,500
Interest payable 2,500 4,000
Income tax payable 6,500 3,000
Dividends payable 4,000 0
Total current liabilities $ 28,000 $ 34,500
Long-term notes payable 10,000 40,000
Common stock, $1 par 30,000 28,000
Preferred stock, $4 par 24,000 10,000
Additional paid-in capital 45,000 30,000
Retained earnings 22,900 12,000
Total liabilities and stockholders' equity $159,900 $154,500
OPERATING ACTIVITIES
PXE Company
Income Statement
For the Year Ended December 31, 2006
Sales $ 400,000
Cost of goods sold (250,000)
Gross profit $ 150,000
General and administrative expenses $80,000
Salaries expense 31,000
Rent expense 3,600
Depreciation expense 7,000
Total operating expenses (121,600)
Other revenue and expenses:
Gain on sale of land $ 3,000
Interest revenue 300
Interest expense (2,800) 500
Income before income taxes $ 28,900
Income tax expense (8,000)
Net income $ 20,900
Additional requirement:
a. The company declared dividends in the amount of $10,000 in the year.
b. Additional equipment and land were purchased for cash.
c. Land that had generally cost $9,000 was sold for $12,000 cash.
d. All accounts payable are related to merchandise purchases.
e. The company uses a perpetual LIFO inventory uses and system straight-line depreciation for all depreciable assets.
Required:
1. Evaluate the operating activities section of the statement of cash flows using the indirect method.