Fundamentals Of Financial Accounting
Fundamentals Of Financial Accounting
6th Edition
ISBN: 9781259864230
Author: PHILLIPS, Fred, Libby, Robert, Patricia A.
Publisher: Mcgraw-hill Education,
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Chapter 12, Problem 5PA

Computing Cash Flows from Operating Activities (Direct Method)

Refer to the information in PA12-2.

Required:

Prepare the cash flows from operating activities section of the statement of cash flows using the direct method.

Expert Solution & Answer
Check Mark
To determine

To prepare: cash flows from operating activities section ofthe statement of cash flows for the current year ended December 31 using the direct method.

Explanation of Solution

Statement of cash flows

Statement of cash flow is a financial statement that shows the cash and cash equivalents of a company for a particular period of time. It shows the net changes in cash, by reporting the sources and uses of cash as a result of operating, investing, and financing activities of a company.

Prepare the statement of cash flows of Company DP for the year ended December 31, under direct method.

Company DP
Statement of Cash Flows (Direct Method)
For the year ended December 31
Particulars Amount ($) Amount ($)
Cash flows from operating activities:    
Refer to Table (2)    
Cash received from customers (2) 48,620  
Cash paid to suppliers(3) (21,260)  
Cash paid for salaries and wages payable (4) (8,960)  
Cash paid for rent(5) (4,505)  
Cash paid for insurance(6) (1,897)  
Cash paid for utilities expense(7) (1,395)  
Cash paid for interest expense (1,800)
Net cash flow from operating activities   8,803

Table (1)

Working Note:

Determine the changes in current assets and Liabilities.

Schedule of changes in current assets and liabilities
Particulars Amount $
Ending Balances Beginning Balances Increase/ (Decrease)
Accounts receivable 560 580 (20)
Inventory 990 770 220
Prepaid rent 25 20 5
Prepaid insurance 25 28 (3)
Accounts payable 420 460 (40)
Salaries and wages payable 100 60 40
Utilities Payable 20 15 5

Table (2)

(1)

Determine the cash received from customers.

Cash receivedfrom customers}=(Sales revenue +Decrease in accounts receivable (1))=$48,600+$20=$48,620 (2)

Determine the cash paid to suppliers.

Cash paid to suppliers }=(Cost of Goods Sold)+(Increase in inventory (1))(Decrease in Accounts payable (1))=$21,000+$220($40)=$21,220+$40=$21,260 (3)

Determine the cash paid for salaries and wages payable.

Cash payments forsalaries and wages expense }=(Salaries and wages expense)(Increase in salaries and wages payable (1))=$9,000$40=$8,960 (4)

Determine the cash paid for rent expense.

Cash paid for rent expense }=(Rentexpense)+(Increase in prepaid rent (1))=$4,500$5=$4,505 (5)

Determine the cash paid for insurance expense.

Cash paid for insurance expense }=(Insuranceexpense)+(Decrease in prepaid rent (1))=$1,900$3=$1,897 (6)

Determine the cash paid for rent.

Cash paid for utilities expenses }=(Utilitiesexpense)+(Increase in utilities expenses payable (1))=$1,400$5=$1,395 (7)

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Chapter 12 Solutions

Fundamentals Of Financial Accounting

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