23-7 (SCF Direct and Indirect Methods from Comparative Financial Statements) Chapman Company, a major retailer of bicycles and accessories, operates several stores and is a publicly traded company.

23-7 (SCF—Direct and Indirect Methods from Comparative Financial Statements) Chapman

Company, a major retailer of bicycles and accessories, operates several stores and is a publicly traded

company. The comparative statement of financial position and income statement for Chapman as of

May 31, 2010, are shown on the next page. The company is preparing its statement of cash flows

CHAPMAN COMPANY

COMPARATIVE STATEMENT OF FINANCIAL POSITION

AS OF MAY 31

2010 2009

Current assets

Cash $ 28,250 $ 20,000

Accounts receivable 75,000 58,000

Merchandise inventory 220,000 250,000

Prepaid expenses 9,000 7,000

Total current assets 332,250 335,000

Plant assets

Plant assets 600,000 502,000

Less: Accumulated depreciation 150,000 125,000

Net plant assets 450,000 377,000

Total assets $782,250 $712,000

Current liabilities

Accounts payable $123,000 $115,000

Salaries payable 47,250 72,000

Interest payable 27,000 25,000

Total current liabilities 197,250 212,000

Long-term debt

Bonds payable 70,000 100,000

Total liabilities 267,250 312,000

Shareholders’ equity

Common stock, $10 par 370,000 280,000

Retained earnings 145,000 120,000

Total shareholders’ equity 515,000 400,000

Total liabilities and shareholders’ equity $782,250 $712,000

CHAPMAN COMPANY

INCOME STATEMENT

FOR THE YEAR ENDED MAY 31, 2010

Sales $1,255,250

Cost of merchandise sold 722,000

Gross profit 533,250

Expenses

Salary expense 252,100

Interest expense 75,000

Other expenses 8,150

Depreciation expense 25,000

Total expenses 360,250

Operating income 173,000

Income tax expense 43,000

Net income $ 130,000

The following is additional information concerning Chapman’s transactions during the year ended

May 31, 2010.

1. All sales during the year were made on account.

2. All merchandise was purchased on account, comprising the total accounts payable account.

3. Plant assets costing $98,000 were purchased by paying $28,000 in cash and issuing 7,000 shares of stock.

4. The “other expenses” are related to prepaid items.

5. All income taxes incurred during the year were paid during the year.

6. In order to supplement its cash, Chapman issued 2,000 shares of common stock at par value.

7. There were no penalties assessed for the retirement of bonds.

8. Cash dividends of $105,000 were declared and paid at the end of the fiscal year.

Instructions

(a) Compare and contrast the direct method and the indirect method for reporting cash flows from

operating activities.

(b) Prepare a statement of cash flows for Chapman Company for the year ended May 31, 2010, using

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