Chapter 13, Problem 4AP

a.

To determine

Prepare a partial statement of cash flows, including only the operating activities sections of the statement of cash flows.

Explanation of Solution

Statement of cash flows: Statement of cash flows 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.

Cash flows from operating activities: Cash flows from operating activity represent the net cash flows from the general operation of the business by comparing the cash receipt and cash payments.

Direct method: The direct method uses the cash basis of accounting for the preparation of the statement of cash flows. It takes into account those revenues and expenses for which cash is either received or paid.

The below table shows the way of calculation of cash flows from operating activities using direct method:

Cash flows from operating activities (Direct method)

Add: Cash receipts.

Cash receipt from customer

Less: Cash payments:

To supplier

Interest expense

For operating expenses

Income tax expenses

Net cash provided from or used by operating activities

Table (1)

The operating activities sections of the statement of cash flows:

T Incorporation
Statement of Cash Flows Direct Method (Partial)
For the Year Ended December 31, 2015
Details	Amount ($)	Amount ($)
Cash flows from operating activities:
Cash receipts:
Cash received from customers	2,920,000
Interest and dividend received	171,000
Total cash receipts		3,091,000
Cash payments:
Cash paid to suppliers and employees	(2,476,000)
Interest paid	(176,000)
Income taxes paid	(103,000)
Total cash payments		(2,755,000)
Net cash provided by operating activities		$336,000

Table (2)

Working notes:

The amount of cash receipts from customers:

Step 1: Calculate the change in accounts receivable.

$\begin{array}{c}\text{Change in accounts receivable}=\left(\begin{array}{l}\text{Ending balance}\\ -\text{Beginning balance}\end{array}\right)\\ =\text{\$650,000}-\$720,000\\ =\$70,000\left(\text{Decrease}\right)\end{array}$

Step 2: The Calculate the amount of cash receipts from customers.

$\begin{array}{c}\begin{array}{l}\text{Cash}\text{receipts}\text{from}\\ \text{Customers}\end{array}]=\text{Net sales }\left(\begin{array}{l}+\text{Decrease in Accounts Receivable}\\ \text{OR}\\ -\text{Increase in Accounts Receivable}\end{array}\right)\\ =\text{ Net sales + Decrease in Accounts Receivable}\\ =\$2,850,000+\$70,000\\ =\$2,920,000\end{array}$

The amount of interest and dividend received:

Step 1: Calculate the change in interest receivable.

$\begin{array}{c}\text{Change in interest receivable}=\left(\begin{array}{l}\text{Ending balance}\\ -\text{Beginning balance}\end{array}\right)\\ =\text{\$9,000}-\$6,000\\ =\$3,000\left(\text{Increase}\right)\end{array}$

Step 2: The Calculate the amount of cash receipts from customers.

$\begin{array}{c}\begin{array}{l}\text{Interest and }\\ \text{dividend received}\end{array}]=\left\{\begin{array}{l}\text{Interest income + Dividend income}\\ \left(\begin{array}{l}+\text{Decrease in Interest Receivable}\\ \text{OR}\\ -\text{Increase in Interest Receivable}\end{array}\right)\end{array}\right\}\\ =\left[\begin{array}{l}\left(\text{Interest income + Dividend income}\right)\\ -\text{ Increase in Accounts Receivable}\end{array}\right]\\ =\left[\left(\text{ \$70,000 +\$104,000}\right)-\text{ \$3,000}\right]\\ =\$174,000-\$3,000\\ =\$171,000\end{array}$

Calculate the cash paid to supplier and employees.

Step 1: Calculate the change in inventory.

$\begin{array}{c}\text{Change in inventory=}\left(\begin{array}{l}\text{Ending balance}\\ -\text{Beginning balance}\end{array}\right)\\ =\text{\$800,000}-\$765,000\\ =\$35,000\left(\text{Increase}\right)\end{array}$

Step 2: Calculate the change in accounts payable.

$\begin{array}{c}\text{Change in accounts payable}=\left(\begin{array}{l}\text{Ending balance}\\ -\text{Beginning balance}\end{array}\right)\\ =\text{\$570,000}-\$562,000\\ =\$8,000\left(\text{Increase}\right)\end{array}$

Step 3: Calculate the amount of cash paid to suppliers of merchandise.

$\begin{array}{c}\left(\begin{array}{l}\text{Cash}\text{paid to }\text{suppliers}\\ \text{of merchandise}\end{array}\right)=\text{Cost of Goods Sold }\left(\begin{array}{l}+\text{Decrease in Accounts Payable}\\ \text{/}\text{Increase in Inventory}\\ \text{OR}\\ -\text{Increase in Accounts Payable }\\ \text{/}\text{Decrease in Inventory}\end{array}\right)\\ =\left(\begin{array}{l}\text{Cost of goods sold }-\text{ Increase in accounts payable}\\ \text{ + Increase in inventory}\end{array}\right)\\ =\$1,550,000-\$8,000+\$35,000\\ =\$1,577,000\end{array}$

Step 4: Calculate the change in short-term prepayment.

$\begin{array}{c}\text{Change in short-term prepayment =}\left(\begin{array}{l}\text{Ending balance}\\ -\text{Beginning balance}\end{array}\right)\\ =\text{\$20,000}-\$15,000\\ =\$5,000\left(\text{Increase}\right)\end{array}$

Step 5: Calculate the change in accrued operating expenses payable.

$\begin{array}{c}\begin{array}{l}\text{Change in accrued operating}\\ \text{expenses payable}\end{array}\}=\left(\begin{array}{l}\text{Ending balance}\\ -\text{Beginning balance}\end{array}\right)\\ =\text{\$65,000}-\$94,000\\ =\$29,000\left(\text{Decrease}\right)\end{array}$

Step 6: Calculate the amount paid for operating expenses.

$\begin{array}{l}\left(\text{Cash}\text{paid to }\text{operating expenses}\right)=\left\{\begin{array}{l}\text{Operating expenses }-\text{Depreciation expenses }\\ \left(\begin{array}{l}+\text{Decrease in Accrued Operating}\\ \text{ Expenses Payable}\\ \text{/}\text{Increase in Short-Term Prepayment}\\ \text{OR}\\ -\text{Increase inAccrued Operating }\\ \text{Expenses PayablePayable }\\ \text{/}\text{Decrease in Short-Term Prepayment}\end{array}\right)\end{array}\right\}\\ =\left(\begin{array}{l}\text{Operating expenses }-\text{Depreciation expenses }\\ \text{+}\text{Decrease in accrued operating}\\ \text{ expenses payable + }\\ \text{Increase in Short-Term Prepayment}\end{array}\right)\\ =\left(\text{\$980,000}-\$115,000\text{ +}\text{\$29,000 + \$5,000}\right)\\ =\$899,000\end{array}$

Step 7: Calculate the amount of cash paid to supplier and employees.

$\begin{array}{c}\text{Cash paid to supplier and employees}=\left(\begin{array}{l}\text{Cash paid to suppliers of merchandise}\\ +\text{ Cash paid for operating expenses}\end{array}\right)\\ =\text{\$1,557,000}+\$899,000\\ =\$2,476,000\end{array}$

Calculate the amount of cash paid for interest expenses:

Step 1: Calculate the change in accrued interest payable.

$\begin{array}{c}\text{Change in accrued interest payable =}\left(\begin{array}{l}\text{Ending balance}\\ -\text{Beginning balance}\end{array}\right)\\ =\text{\$21,000}-\$12,000\\ =\$9,000\left(\text{Increase}\right)\end{array}$

Step 2: Calculate the amount of cash paid for interest expenses.

$\begin{array}{c}\left(\begin{array}{l}\text{Cash paid for}\\ \text{interest expenses}\end{array}\right)=\left\{\begin{array}{l}\text{Interest expense}\\ \left(\begin{array}{l}+\text{Decrease in accrued expenses payable}\\ \text{OR}\\ -\text{Increase in accrued expenses payable}\end{array}\right)\end{array}\right\}\\ =\left(\begin{array}{l}\text{Interest expense }-\\ \text{Increase in accrued expenses payable}\end{array}\right)\\ \text{=}\left(\text{\$185,000 }-\$9,000\right)\\ =\$176,000\end{array}$

Calculate the amount of cash paid for income tax expenses:

Step 1: Calculate the change in income taxes payable.

$\begin{array}{c}\text{Change in accrued income taxes payable =}\left(\begin{array}{l}\text{Ending balance}\\ -\text{Beginning balance}\end{array}\right)\\ =\text{\$22,000}-\$35,000\\ =\$13,000\left(\text{Decrease}\right)\end{array}$

Step 2: Calculate the amount of cash paid for income taxes.

$\begin{array}{c}\left(\begin{array}{l}\text{Cash paid }\\ \text{for Income taxes}\end{array}\right)=\text{Income tax expense}\left(\begin{array}{l}+\text{Decrease in income tax payable}\\ \text{OR}\\ -\text{Increase in income tax payable}\end{array}\right)\\ =\left(\text{Income tax expense + Decrease in income tax payable}\right)\\ \text{=}\left(\text{\$90,000 + }\$13,000\right)\\ =\$103,000\end{array}$

b.

To determine

Describe two other ways that cash flows from operations could be increased.

Explanation of Solution

• Reduce the amount of inventory or clear the inventory in hand.
• The amount of short-term prepayments of expenses should be reduced.
• The purchases of goods and services on account should be paid in short-term period. This would lead to increase the cash flows from operations.