The following data are taken from the records of Saro Corporation and subsidiaries for Year 1: Net

Question:

The following data are taken from the records of Saro Corporation and subsidiaries for Year 1:

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,000

Depreciation, depletion, and amortization . . . . . . . . . . . . . . . . . . . . . . 8,000

Disposals of property, plant, and equipment (book value) for cash . . . 1,000

Deferred income taxes for Year 1 (noncurrent) . . . . . . . . . . . . . . . . . . . 400

Undistributed earnings of unconsolidated affiliates . . . . . . . . . . . . . . 200

Amortization of discount on bonds payable . . . . . . . . . . . . . . . . . . . . . 50

Amortization of premium on bonds payable . . . . . . . . . . . . . . . . . . . . . 60

Decrease in noncurrent assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,500

Cash proceeds from exercise of stock options . . . . . . . . . . . . . . . . . . . 300

Increase in accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 900

Increase in accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,200

Decrease in inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 850

Increase in dividends payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300

Decrease in notes payable to banks . . . . . . . . . . . . . . . . . . . . . . . . . . . 400

Required:

a. Determine the amount of cash flows from operations for Year 1 (use the indirect format).

b. For the following items, explain their meaning and implications, if any, in adjusting net income to arrive at cash flows from operations.

(1) Issuance of treasury stock as employee compensation.

(2) Capitalization of interest incurred.

(3) Amount charged to pension expense differing from the amount funded.

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