Chapter 12, Problem 5CP

To determine

Prepare the cash flows from operating activities section of the statement of cash flows of Company HH for the year ended December 31, using the direct method.

Explanation of Solution

Statement of cash flows: This statement 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. Operating activities include cash inflows and outflows from business operations. Investing activities includes cash inflows and cash outflows from purchase and sale of land or equipment, or investments. Financing activities includes cash inflows and outflows from issuance of common stock and debt, payment of debt and dividends.

Operating activities: Operating activities include cash inflows and outflows from business operations.

Direct method: Under direct method, cash receipts from customers (cash inflows) and cash payments to suppliers (cash outflows) are reported under the operating activities.

Prepare the operating activities section of statement of cash flows of Company HH for the year ended December 31, under direct method.

Company HH
Statement of Cash Flows (Direct Method)
For the year ended
Particulars	Amount ($)
Cash flows from Operating activities:
Cash receipts from customers (1)	$2,130
Cash payments to suppliers (2)	(932)
Cash payments for salaries and wages  (3)	(491)
Cash payments for rent (4)	(242)
Cash payments for insurance (5)	(89)
Cash payments for utilities (6)	(90)
Cash payments for interest	(60)
Net cash provided by operating activities	$ 226

Table (1)

Working note (1):

Determine the cash received from customers:

$\begin{array}{c}\text{Cash receipts from customers}=\left[\text{sales}+\left(\begin{array}{l}\text{Opening accounts}\\ \text{receivables}\end{array}\right)-\left(\begin{array}{l}\text{Closing accounts}\\ \text{receivables}\end{array}\right)\right]\\ \text{=}\text{\$2,060}+\text{\$450}-\text{\$380}\\ \text{=}\text{\$2,130}\end{array}$

Working note (2):

Determine the cash paid to suppliers:

$\begin{array}{c}\begin{array}{l}\text{Cash payments}\\ \text{to suppliers}\end{array}\}=\left[\begin{array}{l}\text{Cost}\text{of}\text{goods}\text{sold}+\left(\begin{array}{l}\text{Closing inventory}-\\ \text{ Opening}\text{inventory}\end{array}\right)\\ +\left(\begin{array}{l}\text{Opening accounts payable}\\ -\text{Closing accounts payable}\end{array}\right)\end{array}\right]\\ =\$900+\left(\$82-\$60\right)+\left(\$210-\$200\right)\\ =\$932\end{array}$

Working note (3):

Calculate cash payments for salaries and wages expenses:

$\begin{array}{c}\begin{array}{l}\text{Cash payments}\\ \text{for salaries }\\ \text{and wages}\end{array}\}\text{=}\left[\begin{array}{l}\left(\text{Salaries and wages expenses}\right)-\left(\text{Opening accounts receivables}\right)\\ \text{+}\left(\text{Closing accounts receivables}\right)\end{array}\right]\\ =\$500-\$29+\$20\\ =\$491\end{array}$

Working note (4):

Calculate cash payment for rent:

$\begin{array}{c}\begin{array}{l}\text{Cash payments}\\ \text{ for rent}\end{array}\}\text{=}\left[\begin{array}{l}\left(\text{Rent expenses}\right)-\left(\text{Opening rent expense}\right)\\ \text{+}\left(\text{Closing rent expense}\right)\end{array}\right]\\ =\$250-\$10+\$2\\ =\$242\end{array}$

Working note (5):

Calculate cash payments for Insurance:

$\begin{array}{c}\begin{array}{l}\text{Cash payments}\\ \text{for insurance}\end{array}\}\text{=}\left[\begin{array}{l}\left(\text{Insurance expenses}\right)+\left(\text{Opening insurance expense}\right)\\ -\left(\text{Closing insurance expense}\right)\end{array}\right]\\ =\$80+\$14-\$5\\ =\$89\end{array}$

Working note (6):

Calculate cash payments for utilities:

$\begin{array}{c}\begin{array}{l}\text{Cash payments}\\ \text{ for utilities}\end{array}\}\text{=}\left[\begin{array}{l}\left(\text{Utilities expenses}\right)\text{+}\left(\text{Opening utilities expense}\right)\\ -\left(\text{Closing utilities expense}\right)\end{array}\right]\\ =\$50+\$60-\$20\\ =\$90\end{array}$