Chapman Company, a major retailer of bicycles and accessories, operates several stores and is a publicly traded company. The comparative statement of financial position and the income statement for Chapman as of May 31, 2022, are as follows. The company is preparing its statement of cash flows.

                              Chapman Company
                             Income Statement
                For the Year Ended May 31, 2022
Sales revenue ............................................................ $1,255,250
Cost of merchandise sold .............................................. 722,000
Gross profit ...................................................................... 533,250
Expenses
Salaries and wages expense .......................................... 252,100
Interest expense ................................................................ 75,000
Other expenses ................................................................... 8,150
Depreciation expense ....................................................... 25,000
Total expenses ................................................................. 360,250
Operating income ........................................................... 173,000
Income tax expense .......................................................... 43,000
Net income .................................................................. $ 130,000

The following is additional information concerning Chapman’s transactions during the year ended May 31, 2022.

1. All sales during the year were made on account.

2. All merchandise was purchased on account, comprising the total accounts payable account.

3. Plant assets costing $98,000 were purchased by paying $28,000 in cash and issuing 7,000 ordinary shares.

4. The “other expenses” are related to prepaid items.

5. All income taxes incurred during the year were paid during the year.

6. In order to supplement its cash, Chapman issued 2,000 ordinary shares at par value.

7. There were no penalties assessed for the retirement of bonds.

8. Cash dividends of $105,000 were declared and paid at the end of the fiscal year.

Instructions

a. Compare and contrast the direct method and the indirect method for reporting cash flows from operating activities.

b. Prepare a statement of cash flows for Chapman Company for the year ended May 31, 2022, using the direct method. Be sure to support the statement with appropriate calculations.

c. Using the indirect method, calculate only the net cash flow from operating activities for Chapman Company for the year ended May 31, 2022.

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Chapman Company Comparative Statements of Financial Position As of May 31 2022 2021 Plant assets Plant assets $600,000 $502,000 Less: Accumulated depreciation-plant assets 150,000 125,000 450,000 377,000 Current assets Inventory 220,000 250,000 Prepaid expenses 9,000 7,000 Accounts receivable 75,000 58,000 Cash 28,250 20,000 Total current assets 332,250 335,000 Total assets $782,250 $712,000 Equity Share capital-ordinary, $10 par $370,000 $280,000 Retained earnings 145,000 120,000 Total equity 515,000 400,000 Non-current liabilities Bonds payable 70,000 100,000 Current liabilities Accounts payable Salaries and wages payable 123,000 115,000 47,250 72,000 Interest payable 27,000 25,000 Total current liabilities 197,250 212,000 Total liabilities 267,250 312,000 Total equity and liabilities $782,250 $712,000