
Concept explainers
Cash flow statement gives the information related to the
To prepare: Journal entries and cash flow statement.

Explanation of Solution
Decrease in the
Date | Account title and explanation | post ref. | Amount ($) | Amount ($) |
Cash | 200 | |||
Account receivable | 200 | |||
(to record the account receivable) |
Table(1)
- Cash is the assets account. Here, cash has been received from the account receivable which increases the cash of the company. So, debit the cash account.
- Account receivable account is the assets account. Here, account receivable is decreased. So credit the account receivable account.
Purchase the inventory by cash
Date | Account title and explanation | post ref. | Amount ($) | Amount ($) |
Inventory account | 440 | |||
Cash | 440 | |||
(to record the purchase of the inventory) |
Table(2)
- Inventory is the assets account. Here, the inventory of the company is decreasing which decreases the asset of the company. So, debit the inventory account.
- Cash is the asset account. Here, cash of the company is decreasing which decrease the asset value of the company. So credit the assets account.
Decrease in the prepaid expenses
Date | Account title and explanation | post ref. | Amount ($) | Amount ($) |
Expense | 20 | |||
Prepaid expense | 20 | |||
(to record the prepaid expenses) |
Table(3)
- Expense is the expense account. Since expense is increasing it reduces the equity. Hence, debit expense account.
- Prepaid expense is the assets account. Here the prepaid expense is reducing. So, credit the prepaid expense account.
Increase in the prepaid expenses
Date | Account title and explanation | post ref. | Amount ($) | Amount ($) |
Prepaid rent | 40 | |||
Cash | 40 | |||
(to record the prepaid rent) |
Table(4)
- Prepaid rent is the assets account. Here, rent has been paid in advance which increase the assets of the company. So, debit the prepaid expense.
- Cash is the asset account. Here, cash of the company is decreasing which decrease the asset value of the company. So credit the assets account.
Decrease in the account payable
Date | Account title and explanation | post ref. | Amount ($) | Amount ($) |
Account payable | 200 | |||
Cash | 200 | |||
(to record the account payable) |
Table(5)
- Account payable is the liability account. Since account payable reduces the equity of the company. Hence, debit the account payable.
- Cash is the assets account. Since, the cash of the company is reducing. Hence, credit the cash account.
Increase in salaries payable
Date | Account title and explanation | post ref. | Amount ($) | Amount ($) |
Salary expense | 180 | |||
Salaries payable | 180 | |||
(to record the salaries payable) |
Table(6)
- Salaries expense account is the expense account. Here, salaries expense of the company is increasing. So, debit the salaries expense account.
- Salaries payable is the liabilities account. Here, salaries payable is increasing which increase the liabilities of the company. So, credit the salaries payable account.
Increase in utilities payable
Date | Account title and explanation | post ref. | Amount ($) | Amount ($) |
Utilities expense | 60 | |||
Utilities payable | 60 | |||
(to record the utilities payable) |
Table(7)
- Utilities expense account is the expense account. Here, utilities expense of the company is increasing. So, debit the utilities expense account.
- Utilities payable is the liabilities account. Here, utilities payable is increasing which increase the liabilities of the company. So, credit the utilities payable account.
Cash flow statement (direct method)
Cash flow from operating activities (direct method) | 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 note:
Given,
Sales revenue is $97,200.
Account receivable for the year 2016 is $5,800.
Account receivable for the year 2017 is $5,600.
Computation of cash received from customer,
Cash receipt from customer is $97,400.
Given,
Rent expense is $9,000.
Prepaid rent for the year 2017 is $220.
Prepaid rent for the year 2016 is $180.
Computation of the cash paid for rent,
Cash paid for rent is $9,040.
Given,
Salaries expense is $18,000.
Salaries payable for the year 2016 is $700.
Salaries payable for the year 2017 is $880
Computation of the salaries payable,
Cash paid for the salaries is $17,820.
Given,
Insurance expense is $3,800.
Prepaid insurance for the year 2017 is $260.
Prepaid insurance for the year 2016 is $280.
Computation of cash paid for insurance,
Cash paid for insurance is $3,780.
Given,
Utilities expense is $2,800.
Utilities payable for the year 2016 is $160.
Utilities payable for the year 2017 is $220.
Computation of cash paid for utilities,
Cash paid for utilities is $2,740.
Given,
Cost of goods sold is $42,000.
Opening inventory is $ 1,540.
Closing inventory is $ 1,980
Account payable for the year 2016 is $4,600.
Account receivable for the year is $4,400.
Computation of cash paid to acquire inventory,
Cash paid to acquire inventory is $42,640.
Cash flow statement (Indirect method)
Cash flow from operating activities | Amount ($) |
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(9)
Working note:
Calculate the amount of the net working capital
Particulars | 2017 | 2016 | Increase/decrease |
Account 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 | ||
Account 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(10)
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