Chapter 12, Problem 2GLP

To determine

Statement of cash flows:

The statement of cash flow is a financial statement, which provides a summary of actual or anticipated cash inflow and cash outflow in a firm over an accounting period. It determines the net changes in cash through reporting the sources and uses of cash due to operating, investing, and financial activities of a company.

Journal entry:

Journal is the primary record of the business transaction in chronological (date wise) order. Journal entry contains two effects, one is debit and the other is credit, under the double entry book keeping system.

To prepare: Summary journal entries reflecting changes in consecutive trial balances.

Explanation of Solution

Prepare the journal entries as shown below.

Decrease in the account receivable:

Date	Particulars	L/F	Amount ($)	Amount ($)
	Cash		200
	Accounts receivable			200
	(To record the account receivable)

Table (1)

• Cash is an asset account. Here, cash has been received from accounts receivable which increases the cash of the company. So, cash account is debited.

• Accounts receivable account is an asset account. Here, accounts receivable is decreased. So, the accounts receivable account is credited.

Purchase the inventory by cash:

Date	Particulars	L/F	Amount ($)	Amount ($)
	Inventory account		440
	Cash			440
	(To record the purchase of the inventory)

Table (2)

• Inventory is an assets account. Here, the inventory of the company is decreasing which decreases the asset of the company. So, the inventory account is debited.

• Cash is an asset account. Here, cash of the company is decreasing which decreases the asset value of the company. So the assets account is credited.

Decrease in the prepaid expenses:

Date	Particulars	L/F	Amount ($)	Amount ($)
	Expenses		20
	Prepaid expense			20
	(To record the prepaid expenses)

Table (3)

• Expenses being an expense account it increases and equity decreases. Hence, expense account is debited.

• Prepaid expense is an assets account. Here, the prepaid expense decreases so, prepaid expense account is credited.

Increase in the prepaid expenses

Date	Particulars	L/F	Amount ($)	Amount ($)
	Prepaid rent		40
	Cash			40
	(To record the prepaid rent)

Table (4)

• Prepaid rent is an assets account. Here, rent has been paid in advance which increases the assets of the company. So, prepaid expense is debited.

• Cash account is an asset account. Here, cash has been received by the company which increases the assets of the company. So, cash account is debited.

Decrease in the account payable:

Date	Particulars	L/F	Amount ($)	Amount ($)
	Accounts payable		200
	Cash			200
	(To record the accounts payable)

Table (5)

• Accounts payable is a liability account. Since, accounts payable reduces the equity of the company, so it must be debited.

• Cash is an asset account. Since, the cash of the company is reducing, so, it must be credited.

Decrease in the prepaid expenses:

Date	Particulars	L/F	Amount ($)	Amount ($)
	Salary expense		180
	Salaries payable			180
	(To record the salaries payable)

Table (6)

• Salaries expense account is an expense account. Here, salaries expense of the company is increasing. So, the salaries expense account is debited.

• Salaries payable is a liabilities account. Here, salaries payable is increasing which increases the liabilities of the company. So, the salaries payable account is credited.

Increase in utilities payable:

Date	Particulars	L/F	Amount ($)	Amount ($)
	Utilities expense		60
	Utilities payable			60
	(To record the utilities payable)

Table (7)

• Utilities expense account is an expense account. Here, utilities expense of the company is increasing. So, the utilities expense account is debited.

• Utilities payable is a liabilities account. Here, utilities payable is increasing which increases the liabilities of the company. So, the utilities payable account is credited.

Now, prepare the cash flow statement using the direct method as shown below.

Particulars	Amount ($)
Cash receipts form customer	97,400
Cash paid for rent	(9,040)
Cash paid for salaries	(17,820)
Cash paid for insurance	(3,780)
Cash paid for interest	(3,600)
Cash paid for utilities	(2,740)
Cash paid for inventory	(42,640)
Net cash flow from operating activities	17,780

Table (8)

Working notes:

1. Calculate the cash received from customer.

$\begin{array}{c}\text{Cash}\text{receipt}\text{from}\text{customer}s=\left(\begin{array}{l}\text{Sales}\text{revenue}+\text{Accounts}\text{receivable}2014\\ -\text{Accounts}\text{receivable}2015\end{array}\right)\\ =\$97,200+\$5,800-\$5,600\\ =97,400\end{array}$

Thus, the cash receipt from customer is $97,400.

2. Calculate the cash paid for rent.

$\begin{array}{c}\text{Cash}\text{paid}\text{for}\text{rent}=\text{Rent}\text{expense}+\text{Prepaid}\text{rent}2015-\text{Prepaid}\text{rent }2014\\ =\$9,000+\$220-\$180\\ =\$9,040\end{array}$

Thus, the cash paid for rent is $9,040.

3. Calculate the salaries payable.

$\begin{array}{c}\text{Cash}\text{paid}\text{for}\text{salaries}=\left(\begin{array}{l}\text{Salaries}\text{expense}+\text{Salaries}\text{payable}2014\\ -\text{Salaries}\text{payable}2015\end{array}\right)\\ =\$18,000+\$700-\$880\\ =\$17,820\end{array}$

Thus, the cash paid for salaries is $17,820.

4. Calculate the cash paid for insurance.

$\begin{array}{c}\text{Cash}\text{paid}\text{for}\text{insurance}=\left(\begin{array}{l}\text{Insurance}\text{expense}+\text{Prepaid}\text{insurance}2015\\ -\text{Prepaid}\text{insurance}2014\end{array}\right)\\ =\$3,800+\$260-\$280\\ =\$3,780\end{array}$

Thus, cash paid for insurance is $3,780.

5. Calculate the cash paid for utilities.

$\begin{array}{c}\text{Cash}\text{paid}\text{for}\text{utilities}=\left(\begin{array}{l}\text{Utilities}\text{expense}+\text{Utilities}\text{payable}2014\\ -\text{Utilities}\text{payable}2015\end{array}\right)\\ =\$2,800+\$160-\$220\\ =\$2,740\end{array}$

Thus, cash paid for utilities is $2,740.

6. Calculate the cash paid to acquire inventory.

$\begin{array}{c}\text{Cash}\text{paid}\text{to}\text{acquire}\text{inventory}=\left[\begin{array}{l}\text{Cost}\text{of}\text{goods}\text{sold}+\left(\begin{array}{l}\text{Closing}\text{inventory}\\ -\text{Opening inventory}\end{array}\right)+\\ +\left(\begin{array}{l}\text{Accounts}\text{payable}2014-\\ \text{Accounts}\text{payable}2015\end{array}\right)\end{array}\right]\\ =\$42,000+\left(\$1,980-\$1,540\right)+\left(\$4,600-\$4,400\right)\\ =\$42,640\end{array}$

Thus, cash paid to acquire inventory is $42,640.

Now, prepare the cash flow statement using the indirect method as shown below.

Particulars	Amount ($)
Cash flow from operating activities
Net income	6,000
Adjustment for noncash expense
Add: Depreciation expense	12,000
Adjustment for working capital changes:
Less Increase in net working capital	(220)
Net cash flow from operating activities	17,780

Table (13)

Working note:

1. Calculate the amount of net working capital.

Particulars	2015	2014	Increase/ Decrease
Accounts receivable	5,600	5,800	(200)
Inventory	1,980	1,540	440
Prepaid rent	220	280	(60)
Prepaid insurance	260	180	80
Increase (Decrease) in current assets (A)			260
Accounts payable	4,400	4,600	(200)
Salaries payable	880	700	180
Utilities payable	220	160	60
Increase(decrease) in current liabilities (B)			40
Increase (Decrease) in working capital (A – B)			220

Table (14)

Conclusion

Hence, the journal entries reflecting changes in consecutive trial balances are prepared as above.