Question 2: A Cruel World 1
You are given two consecutive balance sheets, an income statement, and a few facts for A Cruel
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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)
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.