Chapter 12, Problem 16E

To determine

Prepare the cash provided or used by operating activities section of the statement of cash flows for S Company

Explanation of Solution

Statement of cash flows: Statement of cash flows reports all the cash transactions which are responsible for inflow and outflow of cash and result of these transactions is reported as ending balance of cash at the end of reported period. Statement of cash flows includes the changes in cash balance due to operating, investing, and financing activities.

Cash flows from operating activities: Cash flows from operating activity represent the net cash flows from the general operation of the business by comparing the cash receipt and cash payments.

Direct method: The direct method uses the cash basis of accounting for the preparation of the statement of cash flows. It takes into account those revenues and expenses for which cash is either received or paid.

The below table shows the way of calculation of cash flows from operating activities using direct method:

Cash flows from operating activities (Direct method)

Add: Cash receipts.

Cash receipt from customer

Less: Cash payments:

To supplier

Interest expense

For operating expenses

Income tax expenses

Net cash provided from or used by operating activities

Table (1)

The cash flows from operating activities of S Company:

S Corporation
Statement of Cash Flows (partial)-Direct Method
For the Year Ended December 31, 2015
Details	Amount ($)	Amount ($)
Cash flows from operating activities:
Receipts:
Collections from customers	1,797,500
Total cash receipts		1,797,500
Payments:
Payment for inventory	(1,028,500)
Payment for salaries	(249,035)
Payment for rent	(49,600)
Payment for utilities	(18,125)
Total cash payments		(1,345,260)
Net cash provided by operating activities		$452,240

Table (2)

Working notes:

The Calculate the amount of cash receipts from customers.

$\begin{array}{c}\begin{array}{l}\text{Cash}\text{receipts}\text{from}\\ \text{Customers}\end{array}]=\text{Sales}\text{revenue }\left(\begin{array}{l}+\text{Decrease in Accounts Receivable}\\ \text{OR}\\ -\text{Increase in Accounts Receivable}\end{array}\right)\\ =\text{ Sales Revenue }-\text{Increase in Accounts Receivable}\\ =\$1,828,000-\$30,500\\ =\$1,797,500\end{array}$

Calculate the amount of cash payments to suppliers.

$\begin{array}{c}\left(\begin{array}{l}\text{Cash}\text{paid }\\ \text{to }\text{suppliers}\end{array}\right)=\text{Cost of Goods Sold }\left(\begin{array}{l}+\text{Decrease in Accounts Payable}\\ \text{/}\text{Increase in Inventory}\\ \text{OR}\\ -\text{Increase in Accounts Payable }\\ \text{/}\text{Decrease in Inventory}\end{array}\right)\\ =\left(\begin{array}{l}\text{Cost of goods sold + Decrease in accounts payable}\\ \text{ + Increase in inventory}\end{array}\right)\\ =\$991,000+\$12,500+\$25,000\\ =\$1,028,500\end{array}$

Calculate the amount of cash paid for salaries expenses:

$\begin{array}{c}\left(\begin{array}{l}\text{Cash paid for}\\ \text{ salaries expenses}\end{array}\right)=\text{Salaries expenses}\left(\begin{array}{l}+\text{Decrease in salaries payable}\\ \text{OR}\\ -\text{Increase in salaries payable}\end{array}\right)\\ =\left(\text{Salaries expenses + Decrease in income tax payable}\right)\\ \text{=}\left(\text{\$245,535 + }\$3,500\right)\\ =\$249,035\end{array}$