Chapter 12, Problem 12.5PA

Computing Cash Flows from Operating Activities (Direct Method)

Refer to the information in PA12-2.

Required:

Prepare the cash flows from operating activities section of the statement of cash flows using the direct method.

To determine

To prepare: cash flows from operating activities section ofthe statement of cash flows for the current year ended December 31 using the 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.

Prepare the statement of cash flows of Company DP for the year ended December 31, under direct method.

Company DP
Statement of Cash Flows (Direct Method)
For the year ended December 31
Particulars	Amount ($)	Amount ($)
Cash flows from operating activities:
Refer to Table (2)
Cash received from customers (2)	48,620
Cash paid to suppliers(3)	(21,260)
Cash paid for salaries and wages payable (4)	(8,960)
Cash paid for rent(5)	(4,505)
Cash paid for insurance(6)	(1,897)
Cash paid for utilities expense(7)	(1,395)
Cash paid for interest expense	(1,800)
Net cash flow from operating activities		8,803

Table (1)

Working Note:

Determine the changes in current assets and Liabilities.

Schedule of changes in current assets and liabilities
Particulars	Amount $
	Ending Balances	Beginning Balances	Increase/ (Decrease)
Accounts receivable	560	580	(20)
Inventory	990	770	220
Prepaid rent	25	20	5
Prepaid insurance	25	28	(3)
Accounts payable	420	460	(40)
Salaries and wages payable	100	60	40
Utilities Payable	20	15	5

Table (2)

(1)

Determine the cash received from customers.

$\begin{array}{c}\begin{array}{l}\text{Cash received}\\ \text{from customers}\end{array}\}=\left(\text{Sales revenue }+\text{Decrease in accounts receivable (1)}\right)\\ =\$48,600+\$20\\ =\$48,620\end{array}$ (2)

Determine the cash paid to suppliers.

$\begin{array}{c}\begin{array}{l}\text{Cash paid to }\\ \text{suppliers }\end{array}\}=\left(\begin{array}{l}\text{Cost of }\\ \text{Goods Sold}\end{array}\right)+\left(\begin{array}{l}\text{Increase in }\\ \text{inventory (1)}\end{array}\right)-\left(\begin{array}{l}\text{Decrease in }\\ \text{Accounts payable (1)}\end{array}\right)\\ =\$21,000+\$220-\left(\$40\right)\\ =\$21,220+\$40\\ =\$21,260\end{array}$ (3)

Determine the cash paid for salaries and wages payable.

$\begin{array}{c}\begin{array}{l}\text{Cash payments for}\\ \text{salaries and wages expense }\end{array}\}=\left(\begin{array}{l}\text{Salaries and }\\ \text{wages expense}\end{array}\right)-\left(\begin{array}{l}\text{Increase in salaries }\\ \text{and wages payable (1)}\end{array}\right)\\ =\$9,000-\$40\\ =\$8,960\end{array}$ (4)

Determine the cash paid for rent expense.

$\begin{array}{c}\begin{array}{l}\text{Cash paid for rent }\\ \text{expense }\end{array}\}=\left(\begin{array}{l}\text{Rent}\\ \text{expense}\end{array}\right)+\left(\begin{array}{l}\text{Increase in prepaid }\\ \text{rent (1)}\end{array}\right)\\ =\$4,500-\$5\\ =\$4,505\end{array}$ (5)

Determine the cash paid for insurance expense.

$\begin{array}{c}\begin{array}{l}\text{Cash paid for insurance }\\ \text{expense }\end{array}\}=\left(\begin{array}{l}\text{Insurance}\\ \text{expense}\end{array}\right)+\left(\begin{array}{l}\text{Decrease in prepaid }\\ \text{rent (1)}\end{array}\right)\\ =\$1,900-\$3\\ =\$1,897\end{array}$ (6)

Determine the cash paid for rent.

$\begin{array}{c}\begin{array}{l}\text{Cash paid for }\\ \text{utilities expenses }\end{array}\}=\left(\begin{array}{l}\text{Utilities}\\ \text{expense}\end{array}\right)+\left(\begin{array}{l}\text{Increase in utilities }\\ \text{expenses payable (1)}\end{array}\right)\\ =\$1,400-\$5\\ =\$1,395\end{array}$ (7)