Chapter 12, Problem 12E

To determine

Cash Flow Statement:

Cash flow statement is that statement in which, transaction related to cash are recorded. It is mandatory report and included in the financial statement of the company. It is divided into three parts operating activities, investing activity, and financial activity

Operating Activity:

Operating activity is the first part of the cash flow statement. The main focuses of the operating activity on the cash inflow and outflow from the selling goods, providing services and manufacturing. Long term capital and investing cost are not included in the operating activity.

Financial Activity:

Financial activity is the part of the cash flow statement. Financial activity involves the long term liability, borrowing and stockholder’s equity. All the changes in the long term liability, equity and borrowings reported in the financial statement.

Investing Activity:

Investing activity is the third part of the cash flow statement which gives the information related to the acquisition and disposal of the long term assets of the company such as land and building, investment and plant.

To prepare: Cash flow statement

Explanation of Solution

Cash flow statement (Direct method)

Cash flow statement	Amount ($)	Amount ($)
Cash flow from operating activities:
Cash collected from customers	664,000
Cash paid to suppliers	(393,300)
Cash paid for other expense	(75,000)
Cash paid for income tax	(44,290)
Cash flow from operating activities(A)		151,410
Cash flow from investing activities:
Cash received on sale of the equipment	10,000
Cash paid for new equipment	(57,600)
Cash flow from investing activities(B)		(47,600)
Cash flow from financing activities:
Cash from issuance of share	60,000
cash paid on retirement	(30,000)
Cash paid for dividend	(90,310)
Cash flow from financing activities(C)		(60,310)
Net increase in cash $\left(\text{A}\right)+\left(\text{B}\right)+\left(\text{C}\right)$		43,500
Cash and cash equivalent, December 31,2016		44,000
Cash and cash equivalent, December 31,2017		87,500

Table(1)

Working notes:

Calculate the cash collected from the customer,

$\begin{array}{c}\text{Cash}\text{collectod}\text{from}\text{customer}=\text{Sales}\text{revenue}-\text{Increase}\text{in}\text{account}\text{receivable}\\ =\text{\$678,000}-\text{\$14,000}\\ =\text{\$664,000}\end{array}$

Calculate the cash paid to supplies,

$\begin{array}{c}\text{Cash}\text{paid}\text{to}\text{supplies}=\left(\begin{array}{l}\text{Cost}\text{of}\text{the}\text{goods}\text{sold}+\text{Decrease}\text{in}\text{account}\text{payable}\\ -\text{Decrease}\text{in}\text{inventory}\end{array}\right)\\ =\$411,000+\$5,000-\$22,700\\ =\$393,300\end{array}$

Calculate the cash paid for other expenses,

$\begin{array}{c}\text{Cash}\text{paid}\text{other}\text{expenses}=\left(\begin{array}{l}\text{Other}\text{expense}+\text{Prepaid}\text{expense2017}-\text{Prepaid}\text{expense2016}\\ -\text{Wages}\text{payable2017}+\text{Wages}\text{payable}\text{2016}\end{array}\right)\\ =\text{\$67,000}+\text{\$4,400}-\text{\$5,400}-\text{\$6,000}+\text{\$15,000}\\ =\text{\$75,000}\end{array}$

Calculate the cash paid for income tax expense:

$\begin{array}{c}\text{Cash}\text{paid}\text{for}\text{income}\text{tax}\text{expense}=\text{Income}\text{tax}\text{expense}+\text{Income}\text{tax}\text{2016}-\text{Income}\text{tax}\text{2017}\\ =\text{\$43,890}+\text{\$3,800}-\text{\$3,400}\\ =\$44,290\end{array}$

Calculate the cash received as dividend,

$\begin{array}{c}\text{Cash}\text{dividends}=\text{Retained}\text{earnings}\text{2016}+\text{Net}\text{Income}-\text{Retained}\text{earnind}\text{2017}\\ =\text{\$24,100}+\text{\$99,510}-\text{\$33,300}\\ =\text{\$90,310}\end{array}$

Calculate the cash received on sale of the equipment,

particular	Amount (S)
Accumulated depreciation 2016	9,000
Add: Depreciation for the year	58,600
Less: Accumulated depreciation	(27,000)
Depreciation on equipment sold	40,600
Original cost of the equipment sold	48,600
Less: Depreciation on equipment	(40,600)
Book value of the equipment sold	8,000
Add: Gain on sale	2,000
Cash received on sale of equipment	10,000

Table(2)