Cash 24000 21000 accounts receivable 45000 39000

Cash $24,000 $21,000
Accounts receivable 45,000 39,000
Inventory 30,000 27,000
Gross fixed assets $42,000 $40,000
Acc. Depreciation 22,000 18,000
Net fixed assets 20,000
Total assets $119,000 $109,000
Liabilities and Equity
Accounts payable $25,000 $30,000
Notes payable 50,000 40,000
Accruals 1,000 2,000
Longterm debts 10,000 8,000
Common stock at par 1,000 1,000
Paidin capital in excess of par 4,000 4,000
Retained earnings 28,000 24,000
Total liabilities and equity $119,000 $109,000
5. The credit manager at First National Bank has just received the income statement and balance sheet for
Magna Fax, Inc. for the year ended December 31,2005. (See Table 3.5.) The bank requires the firm to
report its earnings performance and financial position quarterly as a condition of a loan agreement. The
bank’s credit manager must prepare two key financial statements based on the information sent by Magna
Fax, Inc. This will be passed on to the commercial loan officer assigned to this account, so that he may
review the financial condition of the firm.
(a) Prepare a statement of retained earnings for the year ended December 31, 2005.
(b) Prepare a summary of cash inflows and cash outflows for the year ended December 31, 2005.
(c) Prepare a statement of cash flows for the year ended December 31, 2005, organized by cash flow
from operating activities, cash flow from investment activities, and cash flow from financing
activities.
Answers:

Statement of Cash Flows
For the Year Ended December 31, 2005
Cash Inflows Cash Outflows
Net profits Dividends paid $6,500
after taxes $10,500 Inc. in cash 3,000
Depreciation 4,000 Inc. in acct. Rec 6,000
Inc. in Notes Payable 10,000 Inc. in Inventory 3,000
Inc. in LT debts 2,000 Inc. in Fixed Asset 2,000
Dec. in Acct Pay. 5,000
Dec. in accruals 1,000
Total Inflows $26,500 Total Outflows $26,500
(c)
Magna Fax, Inc.
Statement of Cash Flows
For the Year Ended December 31, 2005
Cash flow from operating activities:
Net profits after taxes $10,500
Depreciation 4,000
Inc. in Accounts Receivable –6,000
Inc. in Inventory –3,000
Dec. in Accounts Payable –5,000
Dec. in Accruals
–$ 500
Cash flow from investment activities:
Inc. in gross fixed assets –2,000
Changes in business interest
–$2,000
Cash flow from financing activities:
Inc. in notes payable $10,000
Inc. in longterm debts 2,000
Changes in S.E. 0
Dividends paid
$5,500
Net increase in cash & marketable sec. $3,000
Level of difficulty: 4
Learning Goal: 2
Topic: Statement of Cash Flows