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Prepare the
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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 section for the year 2017:
L Company | ||
Statement of Cash Flows (partial)-Direct Method | ||
For the Year Ended December 31, 2017 | ||
Details | Amount ($) | Amount ($) |
Cash flows from operating activities: | ||
Receipts: | ||
Collections from customers | 97,400 | |
Total cash receipts | 97,400 | |
Payments: | ||
Cash payments to suppliers | (42,640) | |
Cash payments for salaries | (17,820) | |
Cash payments for rent | (9,040) | |
Cash payments for insurance | (3,780) | |
Cash payments for utilities | (2,740) | |
Cash payments for interest | (3,600) | |
Total cash payments | (79,620) | |
Net cash provided by operating activities | $17,780 |
Table (2)
Working notes:
The amount of cash receipts from customers.
Step 1: Calculate the change in
Step 2: The Calculate the amount of cash receipts from customers.
Calculate the cash payments to suppliers.
Step 1: Calculate the change in inventory.
Step 2: Calculate the change in accounts payable.
Step 3: Calculate the amount of cash payments to suppliers.
Calculate the amount of cash paid for salaries expenses:
Step 1: Calculate the change in salaries payable.
Step 2: Calculate the amount of cash paid for income taxes.
Calculate the amount of cash paid for rent expenses:
Step 1: Calculate the change in prepaid rent.
Step 2: Calculate the amount of cash paid for rent expenses.
Calculate the amount of cash paid for insurance expenses:
Step 1: Calculate the change in prepaid insurance.
Step 2: Calculate the amount of cash paid for insurance expenses.
Calculate the amount of cash paid for utilities expenses:
Step 1: Calculate the change in utilities payable.
Step 2: Calculate the amount of cash paid for utilities expense.
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Chapter 12 Solutions
FINANCIAL ACCT.FUND(LL)W/ACCESS>CUSTOM<
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