1. Preparation of a Statement of Cash Flows. The president of The Hardcastle Corporation understands that a statement of cash flows is one of the required financial statements. He asks your assistance in preparing the statement. He provides you with the following comparative balance sheets for 2011 and 2010, as well as the income statement for the year ended December 31, 2011. THE HARDCASTLE CORPORATION Comparative Balance Sheets December 31, 2010 Assets 2011 Current assets: Cash Accounts receivable Inventory Prepaid expenses Total current assets $ 5,200 20,000 47,000 1,500 $ 73.700 $ 4,200 28.000 33,000 1,000 $ 66,200 Property, plant, and equipment: Land Machinery and equipment, net Buildings, net Total property, plant, and equipment $ 3,800 8,700 42.000 $ 54.500 $ 2,800 8,500 47.000 $ 58,300 Other assets: Patents, net Total assets $ 1,500 $129,700 $ 1,700 $126,200 Liabilities and Owners' Equity 2011 2010 Current liabilities: Notes payable Current maturities of long-term debt Accounts payable Accrued liabilities Total current liabilities Long-term debt: Stockholders' equity: Common stock, no par Retained earnings Total stockholders' equity Total liabilities and stockholders' equity $ 4,000 2,000 5,500 15,000 $ 26,500 $ 18.000 $ 5,800 1,900 6,000 13,000 $ 26,700 $ 30,000 $ 61,000 24,200 $ 85,200 $129,700 $ 60,000 9.500 $ 69.500 $126.200 (continued ) THE HARDCASTLE CORPORATION Statement of Income and Retained Earnings For the Year Ended December 31, 2011 $174,000 Revenues Sales Expenses Cost of goods sold General and administrative Depreciation and amortization Interest Loss on early retirement of long-term debt Loss on sale of machinery and equipment Income before taxes Less: Taxes Net income Retained earnings, January 1 Less: Dividends Retained earnings, December 31 $112.000 26,000 13,000 2.000 400 200 153,600 $ 20,400 4.000 $ 16.400 9,500 (1.700) $ 24,200 In addition, the president has provided you with the following information: 1. Included in depreciation and amortization expense are: Building depreciation Machinery and equipment depreciation Patent amortization $12,000 800 200 2. Machinery and equipment with a book value of $300 was sold for cash. (Hint: Use the related Loss on the Income Statement to figure out the cash amount.) 3. The additional land was acquired in exchange for common stock. No other stock transactions took place. 4. Long-term debt with a face value of $10,000 was retired early. (Again use the related Loss to help you figure out the cash amount.) 5. Short-term notes payable were issued for the purchase of machinery during 2009. (Hint: This means that the short-term notes should be associated with a long-term item (PPE) and you should not use it in your adjustments to Net Income when doing the indirect approach to the operations section.) 6. All other changes represent normal balance sheet transactions. 7. There is no interest accrual at year-end. Required: A. Prepare the entire Statement of Cash Flows for the year ended December 31, 2011. Use the Direct Method for the operations section. Hints/Suggestions: 1) In order to do the direct method for the operations section some assumptions will need to be made concerning what balance sheet accounts are directly associated with what income statement accounts. Please make the following assumptions: Sales go with Accounts Receivables. Cost of Goods Sold go with Inventory and Accounts Payable. General and Administrative Expenses go with Prepaid Expenses and Accrued Liabilities. You may need to make other similar assumptions that you feel are reasonable. 2) When dealing with long-term debt, combine the current maturity balance with the amount shown long-term debt before determining inflows or outflows for long-term debt. B. Prepare a supplemental schedule showing how the operations section of the statement would have appeared if the Indirect Method had been used