Chapter 11, Problem 11.6AP

To determine

To prepare: The cash flow statement of Incorporation A for the year ended December 31, 2015 using direct method.

Explanation of Solution

Statement of cash flows:

Statement of cash flow is a financial statement that shows the cash and cash equivalents of a company for a particular period of time. It shows the net changes in cash, by reporting the sources and uses of cash as a result of operating, investing, and financing activities of a company.

Cash flows from operating activities:

 These refer to the cash received or cash paid in day-to-day operating activities of a company.

Direct method: This method uses the basis of cash for preparing the cash flows of statement.

Cash flows from operating activities: In this direct method, cash flow from operating activities is computed by using all cash receipts and cash payments during the year.

• Cash Receipts: It encompasses all the cash receipts from sale of goods and on account receivable.
• Cash Payments: It encompasses all the cash payments that are made to suppliers of goods and all expenses that are paid.

Cash flow from investing activities:

This section of cash flows statement provides information concerning about the purchase and sale of capital assets by the company.

Cash flow from financing activities:

This section of cash flows statement provides information about the cash inflow and outflow as a result of issuance and financing of debt, issue of new stock and payment of dividends.

The cash flow statement of Incorporation A for the year ended December 31, 2015 is as follows:

Incorporation A
Statement of cash flow- Direct method
For the year ended December 31, 2015
Particulars	Amount($)	Amount ($)
Cash flows from operating activities:
Cash collection:
Cash collection from customer (2) (A)		412,000
Cash Payments:
Cash paid to supplier (4)	(258,400)
Cash paid for income tax (5)	(3,000)
Operating expenses (3)	(54,000)
Total Cash Payments (B)		315,000
Net cash provided by operating activities $\left(\text{A}-\text{B}\right)$		97,000

Table (1)

The net cash provided by operating activities is calculated by deducting all cash payments incurred in the operating of the business from all cash receipts from the operating activities of the business. Here, cash receipt includes cash receipts from customers. Cash payments include all cash payments made to suppliers and operating activities.

Working note:

1. Calculate the increase or decreases of current assets and current liabilities:

Schedule in the changes of assets and liabilities
Details	Increase/Decrease
Accounts receivable	(7,000)
Inventory	14,000
Prepaid rent	(10,000)
Salaries payable	6,000
Accounts payable	(9,000)
Income tax payable	24,000

Table (2)

(1)

2. Calculate the amount of cash receipt from customer:

$\begin{array}{lll}\begin{array}{l}\text{Cash}\text{receipts}\\ \text{from}\text{customers}\end{array}\}\hfill & =\hfill & \text{(Sales}\text{revenue}+\text{Decrease in accounts receivable (1))}\hfill \\ \hfill & =\hfill & \$405,000-\$7,000\hfill \\ \hfill & =\hfill & \$412,000.\hfill \end{array}$

(2)

3. Calculate the amount of cash paid for operating expense:

$\begin{array}{c}\text{Cash}\text{paid}\text{for}\text{operating}\text{expenses=Operating}\text{expenses-Decrease}\text{in}\text{prepaid}\text{rent}\\ \text{-Increase}\text{in}\text{salaries}\text{payable}\text{.}\\ \text{=\$70,000-\$10,000-\$6,000}\text{.}\\ \text{=\$54,000}\text{.}\end{array}$

(3)

4. Calculate the amount of cash paid to the suppliers:

$\begin{array}{c}\begin{array}{l}\text{Cash payments}\\ \text{ to suppliers}\end{array}\}=\left(\begin{array}{l}\text{Cost of goods sold +}\\ \text{Decrease in} \text{accounts payable (1) + }\\ \text{Increase in inventory (1)}\end{array}\right)\\ =\$235,000+\$9,000+\$14,000\\ =\$258,400.\end{array}$

(4)

5. Calculate the amount income tax expense:

$\begin{array}{c}\begin{array}{l}\text{Cash payments }\\ \text{for income tax}\end{array}\}=\text{Income tax expense}-\text{Increase in income tax payable (1)}\\ =\$27,000-\$24,000\\ =\$3,000\end{array}$

(5)