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Question 2: A Cruel World 1

You are given two consecutive balance sheets, an income statement, and a few facts for A Cruel

World Inc.

Balance Sheets (years 0 and 1)

Year 0 Year 1

Cash 3,000 3,000

Accounts Receivable 2,000 4,000

Inventory 3,000 4,000

Property, Plant and Equipment (net) 12,000 11,000

Total Assets 20,000 22,000

Accounts Payable 7,000 5,000

Bonds Payable 5,000 6,000

Total Liabilities 12,000 11,000

Common Stock 3,000 4,000

Retained Earnings 5,000 7,000

Total Shareholders’ Equity 8,000 11,000

Total Liabilities and Equity 20,000 22,000

Income Statement (year 1)

Sales 20,000

Costs of Goods Sold (8,000)

Wage Expense (4,000)

Depreciation Expense (2,000)

Interest Expense (1,000)

Net Income Before Tax 5,000

Tax Expense (2,000)

Net Income 3,000



All property, plant and equipment that is retired or sold is fully depreciated.

Purchases of property, plant and equipment were made in cash.

Interest expense increases the Interest Payable Account.


a. Construct the Statement of Cash Flows for A Cruel World in year 1 using the direct method.

b. Construct the supporting schedule to the Statement of Cash Flows which reconciles net

income to cash flow from operations for A Cruel World in year 1. (That is, calculate cash

flow from operations using the indirect method.)

c. State what it is possible (with the data at hand) to know about cash purchases of inventory for

A Cruel World in year 1.

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