PROBLEM 13-14. Operating Cash Flows, Direct and Indirect Methods [LO 3, 4] Sellmers Pasta, Inc., has the following financial statements:

Sellmers Pasta, Inc.

Balance Sheets

As of December 31, 2013, and 2014

2013 2014

Assets Cash $263,000 $280,900

Accounts receivable 118,000 120,500

Inventory 94,200 83,800

Prepaid expenses 183,800 199,080

Plant and equipment 55,700 80,325

Accumulated depreciation (12,900) (15,500)

Total assets $701,800 $749,105

Liabilities and Equity Accounts payable $172,700 $175,900

Short-term notes payable 62,500 58,200

Accrued wages 29,200 32,800

Long-term notes payable 175,400 156,405

Common stock 72,500 72,500

Retained earnings 189,500 253,300

Total liabilities and equity $701,800 $749,105 532

Sellmers Pasta, Inc.

Income Statement

For the Year Ended December 31, 2014

Sales $449,000

Less: Cost of goods sold (173,000)

Gross margin 276,000

Less operating expenses:

Wages and salaries expense $176,000

Advertising expense 16,400

Misc. operating expenses 12,200

Depreciation expense 2,600 (207,200)

Net income (loss) $ 68,800

At the end of 2014, Sellmer purchased additional equipment for $24,625. Sellmer paid dividends of $5,000 during the year.

Required

a. Prepare a statement of cash flows for 2014 using the direct method. Assume that advertising is paid in cash.

b. Prepare the operating activities section of the statement of cash flows for 2014 using the indirect method. Note that there is no difference between the two methods for the investing and financing sections.