Question

Lansbury Inc. had the following balance sheet at December 31, 2019.

LANSBURY INC. BALANCE SHEET DECEMBER 31, 2019

Cash $20,000 Accounts payable $30,000
Accounts receivable 21,200 Notes payable (long-term) 41,000
Investments 32,000 Common stock 100,000
Plant assets (net) 81,000 Retained earnings 23,200
Land 40,000 $194,200
$194,200

During 2021 the following occurred:

1. Lansbury Inc. sold part of its investment portfolio for $15,000 This transaction resulted in a gain of $3,400 for the firm. The company classifies its investments as available-for- sale.
2. A tract of land was purchased for $18,000 cash.
3. Long-term notes payable in the amount of $16,000 were retired before maturity by paying $16,000 cash.
4. An additional $20,000 in common stock was issued at par.
5. Dividends totaling $8,200 were declared and paid to stockholders.
6. Net income for 2021 was $32,000 after allowing for depreciation of $11,000
7. Land was purchased through the issuance of $30,000 in bonds.
8. At December 31, 2021, Cash was $32,000 Accounts Receivable was $41,600 and Accounts Payable remained at $30,000

Requried:
a. Prepare a statement of cash flows for 2017.
b. Prepare an unclassified balance sheet as it would appear on December 31, 2017.
c. Compute two cash flow ratios.

Answer 1

LANSBURY INC.

Statement of Cash Flows

For the year ended December 31, 2021

Cash flows from operating activities:

Net income $32,000

Adjustments to net income:

• Depreciation expense $11,000
• - Gain on sale of investment portfolio ($3,400)
• - Increase in accounts receivable ($20,400) ($12,800)

Net cash from operating activities $19,200

Cash flows from investing activities:

Sale of investment portfolio $15,000

Purchased land ($30,000)

Purchased land ($18,000)

Net cash from investing activities ($33,000)

Cash flow from financing activities:

Issuance of common stock $20,000

Issuance of bonds $30,000

Retirement of notes payable ($16,000)

Dividends paid ($8,200)

Net cash from financing activities $25,800

Net cash increase $12,000

Beginning cash balance $20,000

Ending cash balance $32,000

b. Prepare an unclassified balance sheet as it would appear on December 31, 2017.

LANSBURY INC.

Balance Sheet

For the year ended December 31, 2021

Assets:

Cash $32,000

Accounts receivable $41,600

Investments $20,400

Plant assets, net $70,000

Land $88,000

Total assets $252,000

Liabilities:

Accounts payable $30,000

Notes payable $25,000

Bonds payable $30,000

Total liabilities $85,000

Stockholders' Equity:

Common stock $120,000

Retained earnings $47,000

Total stockholders' equity $167,000

Total liabilities + equity $252,000

c. cash flow coverage ratio = operating cash flows / total liabilities = $19,200 / $85,000 = 0.23

current liability coverage ratio = operating cash flows / current liabilities = $19,200 / $30,000 = 0.64