Chapter 12, Problem 5PB

To determine

To prepare: The cash flow from operating activities section of statement of cash flows for Incorporation C under 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.

Cash flows from operating activities: These refer to the cash received or cash paid in day-to-day operating activities of a company.

The cash flow from operating activities Incorporation C for the year ended December 31, is as follows:

Incorporation C
Statement of Cash Flows (Direct Method)
For the year ended December, 31
Particulars	Amount	Amount
Cash flows from operating activities:
Cash received from customers (2)	$77,700
Cash paid to suppliers (3)	($36,040)
Cash paid for salaries and wage payable (4)	($9,800)
Cash paid for rent expense (5)	($2,480)
Cash paid for insurance expense (6)	($1,280)
Cash paid for utilities expense (7)	($900)
Cash paid for interest expense	($1,200)
Net cash flows from operating activities		$26,000

Table (1)

Working note:

Prepare schedule of changes in current assets and liabilities:

Schedule of changes in current assets and liabilities
Particulars	Amount
	Ending Balances (1)	Beginning Balances (2)	Increase/ (Decrease) $\left(1\right)-\left(2\right)$
Inventory	$430	$490	($60)
Accounts receivable	$1,800	$1,500	$300
Prepaid rent	$80	$100	($20)
Prepaid Insurance	$70	$90	($20)
Accounts payable	$1,200	$1,300	($100)
Utilities payable	$100	$0	$100
Salaries and wages payable	450	250	200

Table (2)

(1)

Determine the cash received from customers.

$\begin{array}{c}\begin{array}{l}\text{Cash received}\\ \text{from customers}\end{array}\}=\left(\text{Sales revenue }-\text{Increase in accounts receivable}\left(1\right)\right)\\ =\$78,000-\$300\\ =\$77,700\end{array}$ (2)

Determine the cash paid to suppliers.

$\begin{array}{c}\begin{array}{l}\text{Cash paid to }\\ \text{suppliers}\end{array}\}=\left(\begin{array}{l}\text{Cost of }\\ \text{Goods sold}\end{array}\right)-\left(\begin{array}{l}\text{Decrease in }\\ \text{inventory }\left(1\right)\end{array}\right)+\left(\begin{array}{l}\text{Decrease in }\\ \text{accounts payable }\left(1\right)\end{array}\right)\\ =\$36,000-\$60+\$100\\ =\$36,040\end{array}$ (3)

Determine the cash paid for salary and wage expense.

$\begin{array}{c}\begin{array}{l}\text{Cash payments for}\\ \text{salaries and wage expense }\end{array}\}=\left(\begin{array}{l}\text{Salary and }\\ \text{wage expense }\left(1\right)\end{array}\right)-\left(\begin{array}{l}\text{Increase in wage and }\\ \text{salary expenses payable }\left(1\right)\end{array}\right)\\ =\$10,000-\$200\\ =\$9,800\end{array}$ (4)

Determine the cash paid for rent expense.

$\begin{array}{c}\begin{array}{l}\text{Cash payments for}\\ \text{rent expense }\end{array}\}=\text{Rent expense}-\text{Decrease in prepaid rent expense }\left(1\right)\\ =\$2,500-\$20\\ =\$2,480\end{array}$ (5)

Determine the cash paid for insurance expense.

$\begin{array}{c}\begin{array}{l}\text{Cash payments for}\\ \text{insurance expense }\end{array}\}=\text{Insurance expense}-\text{Decrease in prepaid expenses }\left(1\right)\\ =\$1,300-\$20\\ =\$1,280\end{array}$ (6)

Determine the cash paid for utilities expense.

$\begin{array}{c}\begin{array}{l}\text{Cash payments for}\\ \text{utilities payable }\end{array}\}=\text{Utilities expense}-\text{Increase in utilities payable}\\ =\$1,000-\$100\\ =\$900\end{array}$ (7)