Chapter 12, Problem 2PSA

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.

To prepare: Cash flow from operating activities by direct method.

Explanation of Solution

Prepare section related to operating activities of statement of cash flows:

L Company
Statement of Cash Flows
For the Year Ended 31 December, 2017
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

Hence, $17,800 is the net cash flow from operating activities.

Working Note:

Computation of cash received from customer,

$\begin{array}{c}\text{Cash}\text{receipt}\text{from}\text{customer}s=\left(\begin{array}{l}\text{Sales}\text{revenue}+\text{Account}\text{receivable}2016\\ -\text{Account}\text{recevable}2017\end{array}\right)\\ =\$97,200+\$5,800-\$5,600\\ =97,400\end{array}$

Cash receipt from customer is $97,400.

Computation of the cash paid for rent,

$\begin{array}{c}\text{Cash}\text{paid}\text{for}\text{rent}=\text{Rent}\text{expense}+\text{Prepaid}\text{rent}2017-\text{Prepaid}\text{rent}2016\\ =\$9,000+\$220-\$180\\ =\$9,040\end{array}$

Cash paid for rent is $9,040.

Computation of the salaries payable,

$\begin{array}{c}\text{Cash}\text{paid}\text{for}\text{salaries}=\left(\begin{array}{l}\text{Salaries}\text{expense}+\text{Salaries}\text{payable}2016\\ -\text{Salaries}\text{payable}2017\end{array}\right)\\ =\$18,000+\$700-\$880\\ =\$17,820\end{array}$

Cash paid for the salaries is $17,820.

Computation of cash paid for insurance,

$\begin{array}{c}\text{Cash}\text{paid}\text{for}\text{insurance=}\left(\begin{array}{l}\text{Insurance}\text{expense}+\text{Prepaid}\text{insurance}2017\\ -\text{Prepaid}\text{insurance}2016\end{array}\right)\\ =\$3,800+\$260-\$280\\ =\$3,780\end{array}$

Cash paid for insurance is $3,780.

Computation of cash paid for utilities,

$\begin{array}{c}\text{Cash}\text{paid}\text{for}\text{utilities}=\left(\begin{array}{l}\text{Utilities}\text{expense}+\text{Utilities}\text{payable}2016\\ -\text{Utilities}\text{payable}2017\end{array}\right)\\ =\$2,800+\$160-\$220\\ =\$2,740\end{array}$

Cash paid for utilities is $2,740.

Computation of cash paid to acquire inventory,

$\begin{array}{c}\text{Cash}\text{paid}\text{to}\text{acquire}\text{inventory}=\text{Cost}\text{of}\text{goods}\text{sold}\\ +\left(\text{Closing}\text{inventory}-\text{Openinge}\text{inventory}\right)\\ +\left(\begin{array}{l}\text{Account}\text{payable}2016-\\ \text{Account}\text{payable}2017\end{array}\right)\\ =\$42,000+\left(\$1,980-\$1,540\right)+\left(\$4,600-\$4,400\right)\\ =\$42,640\end{array}$