Chapman Company, a major retailer of bicycles and accessories

Chapman Company, a major retailer of bicycles and accessories, operates several stores and is a publicly traded company. The comparative balance sheet and income statement for Chapman as of May 31, 2012, are shown. The company is preparing its statement of cash flows.

CHAPMAN COMPANY

Comparative Balance Sheet

As of May 31                                                                      2012                       2011

Current assets

Cash                                                                                      $ 28,250                $ 20,000

Accounts receivable                                                       75,000                   58,000

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—plant assets   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 and wages 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

Stockholders’ equity

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

Retained earnings                                                           145,000                 120,000

Total stockholders’ equity                                            515,000                 400,000

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

 CHAPMAN COMPANY

Income Statement

For the Year Ended May 31, 2012

Sales                                                      $1,255,250

Cost of goods sold                           722,000

Gross profit                                        533,250

Expenses

Salaries and wages expense       252,100

Interest expense                             75,000  

Depreciation expense                   25,000

Other expenses                               8,150

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, 2012.

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. 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, 2012, using the direct method. Be sure to support the statement with appropriate calculations. (A reconciliation of net income to net cash provided is not required.)

(c) Using the indirect method, calculate only the net cash flow from operating activities for Chapman Company for the year ended May 31, 2012.