E5
E5-18
The comparative balance sheets of Madrasah Corporation at the beginning and end of the year 2014 appear below.
MADRASAH CORPORATION
Balance Sheets
Assets
Dec. 31, 2014
Jan. 1, 2014
Inc./Dec.
Cash
$ 20,000
$ 13,000
$ 7,000 Inc.
Accounts receivable 106,000 88,000 18,000 Inc.
Equipment
39,000 22,000 17,000 Inc.
Less: Accumulated depreciation—equipment 17,000 11,000 6,000 Inc.
Total
$148,000
$112,000
Liabilities and Stockholders' Equity
Accounts payable
$ 20,000
$ 15,000 5,000 Inc.
Common stock 100,000 80,000 20,000 Inc.
Retained earnings 28,000 17,000 11,000 Inc.
Total
$148,000
$112,000
Net income of $44,000 was reported, and dividends of $33,000 were paid in 2014. New equipment was purchased and none was sold.
Instructions
(a)
Prepare a statement of cash flows for the year 2014.
(b)
Compute the current ratio (current assets ÷ current liabilities) as of January 1, 2014, and December 31, 2014, and compute free cash flow for the year 2014.
(c)
In light of the analysis in (b), comment on Madrasah's liquidity and financial flexibility.
(a)
MADRASAH CORPORATION
Statement of cash flow
For the year ended December 31, 2014
Cash flow from operating activities:
Net income
44,000 Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense
6,000
Increase in account receivable
(18,000)
Increase in account payable
5,000
(7,000) Net cash provided by operating activities:
37,000
Cash flow from investing activities
Purchase of equipment
(17,000)
Net cash provided by investing activities:
(17,000)
Cash flow from financing activities
Issuance of common stock
20,000
Payment of cash dividends
(33,000)
Net cash provided by financing activities
(13,000)
Net increase in cash
7,000
Cash at beginning of the year
13,000
Cash at ending of the year
20,000
(b)
At January 1, 2014:
Current asset = cash + account receivable = 13,000 + 88,000 = $ 101,000
Current
The comparative balance sheets of Madrasah Corporation at the beginning and end of the year 2014 appear below.
MADRASAH CORPORATION
Balance Sheets
Assets
Dec. 31, 2014
Jan. 1, 2014
Inc./Dec.
Cash
$ 20,000
$ 13,000
$ 7,000 Inc.
Accounts receivable 106,000 88,000 18,000 Inc.
Equipment
39,000 22,000 17,000 Inc.
Less: Accumulated depreciation—equipment 17,000 11,000 6,000 Inc.
Total
$148,000
$112,000
Liabilities and Stockholders' Equity
Accounts payable
$ 20,000
$ 15,000 5,000 Inc.
Common stock 100,000 80,000 20,000 Inc.
Retained earnings 28,000 17,000 11,000 Inc.
Total
$148,000
$112,000
Net income of $44,000 was reported, and dividends of $33,000 were paid in 2014. New equipment was purchased and none was sold.
Instructions
(a)
Prepare a statement of cash flows for the year 2014.
(b)
Compute the current ratio (current assets ÷ current liabilities) as of January 1, 2014, and December 31, 2014, and compute free cash flow for the year 2014.
(c)
In light of the analysis in (b), comment on Madrasah's liquidity and financial flexibility.
(a)
MADRASAH CORPORATION
Statement of cash flow
For the year ended December 31, 2014
Cash flow from operating activities:
Net income
44,000 Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense
6,000
Increase in account receivable
(18,000)
Increase in account payable
5,000
(7,000) Net cash provided by operating activities:
37,000
Cash flow from investing activities
Purchase of equipment
(17,000)
Net cash provided by investing activities:
(17,000)
Cash flow from financing activities
Issuance of common stock
20,000
Payment of cash dividends
(33,000)
Net cash provided by financing activities
(13,000)
Net increase in cash
7,000
Cash at beginning of the year
13,000
Cash at ending of the year
20,000
(b)
At January 1, 2014:
Current asset = cash + account receivable = 13,000 + 88,000 = $ 101,000
Current