Question 3: Sheffer

The Sheffer Company’s statement of cash flows for 2012 showed the following calculation of

the cash flow from operating activities:

Collections from customers $ 2,245

Payments to suppliers (1,375)

Payments to employees ( 688)

Payments to the IRS (for income tax) ( 72)

Cash flow from operating activities $ 110

The company’s balance sheet at the beginning and end of 2012 showed the following:

Beginning End

of year of year

Accounts payable $ 92 $ 103

Accounts receivable 218 262

Accumulated depreciation 93 122

Income tax payable 142 180

Merchandise inventory 141 189

Plant and equipment (at cost) 338 371

Wages payable 36 37

A note to the financial statements showed that the company bought plant and equipment during

the year for $33.

Required:

a. Prepare an income statement for the Sheffer Company for 2012.

b. Did the Sheffer Company use the direct or the indirect method in preparing its statement of

cash flows?

c. Recently, the FASB has decided to eliminate goodwill amortization. Suppose certain

goodwill was recognized in 2012, and consider the financial statements for a subsequent

year, say 2017, under the assumption there is no impairment. Will the proposed change

result in an increase or a decrease to the Retained Earnings account? Explain.