a.
Prepare a statement of
a.
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)
Cash flows from investing activities: Cash provided by or used in investing activities is a section of statement of cash flows. It includes the purchase or sale of equipment or land, or marketable securities, which is used for business operations.
Cash flows from investing activities |
Add: Proceeds from sale of fixed assets |
Sale of marketable securities / investments |
Deduct: Purchase of fixed assets/long-lived assets |
Purchase of marketable securities |
Net cash provided from or used by investing activities |
Table (2)
Cash flows from financing activities: Cash provided by or used in financing activities is a section of statement of cash flows. It includes raising cash from long-term debt or payment of long-term debt, which is used for business operations.
Cash flows from financing activities |
Add: Issuance of common stock |
Proceeds from borrowings |
Proceeds from sale of |
Proceeds from issuance of debt |
Deduct: Payment of dividend |
Repayment of debt |
Interest paid |
Redemption of debt |
Purchase of treasury stock |
Net cash provided from or used by financing activities |
Table (3)
A statement of cash flow for C technologies for the year ended December 31, 2018.
C Technologies | ||
Statement of Cash Flows Direct Method | ||
For the Year Ended December 31, 2018 | ||
Details | Amount ($) | Amount ($) |
Cash flows from operating activities: | ||
Cash receipts: | ||
Cash received from customers | 3,140,000 | |
Interest received | 42,000 | |
Total cash receipts | 3,182,000 | |
Cash payments: | ||
Cash paid to suppliers and employees | (2,680,000) | |
Interest paid | (38,000) | |
Income taxes paid | (114,000) | |
Total cash payments | (2,832,000) | |
Net cash provided operating activities | 350,000 | |
Cash flows from investing activities: | ||
Purchase of marketable securities | (60,000) | |
Proceeds from sales of marketable securities | 72,000 | |
Loans made to borrowers | (44,000) | |
Collections on loan | 28,000 | |
Cash paid to acquire plant | (500,000) | |
Proceeds from sale of plant assets | 24,000 | |
Net cash used for investing activities | (480,000) | |
Cash flows from financing activities: | ||
Proceeds from short-term borrowing | 82,000 | |
Payments to settle short-term debt | (92,000) | |
Proceeds from issuing common stock | 180,000 | |
Payment of dividend | (120,000) | |
Net cash provided by financing activities | 50,000 | |
Net increase (decrease) in Cash | (80,000) | |
Cash and cash equivalents, January 1, 2018 | 244,000 | |
Cash and cash equivalents, December 31, 2018 | $164,000 |
Table (4)
Working notes:
Calculate the amount of cash receipts from customers.
Calculate the amount of interest received.
Calculate the cash paid to supplier and employees.
Step 1: Calculate the amount of cash paid to suppliers of merchandise.
Step 2: Calculate the amount paid for operating expenses.
Step 3: Calculate the amount of cash paid to supplier and employees.
Calculate the amount of cash paid for interest expenses.
Calculate the amount of cash paid for income tax expenses:
Calculate the amount of proceeds from sales of marketable securities.
Calculate the amount of proceeds from sales of plant assets.
Calculate the amount of proceeds from issuing capital stock.
b.
- 1. Explain the primary reason why the amount of cash provided by operating activities was substantially greater than the company’s net income.
- 2. Explain the primary reason for net decrease in cash over the year, despite the substantial amount of cash provided by operating activities.
b.
Explanation of Solution
The primary reason why the amount of cash provided by operating activities substantially more than the company’s net income is because of the
The primary reason for decrease in cash is investing activities because, C technologies uses their cash in capital expenditure. Hence, investing activities plays a greater role for the net decrease in cash.
c.
Compute the effect that limiting the growth in receivables to $10,000 would have had on the company’s net increase or decrease in cash (and cash equivalents) for the year.
c.
Explanation of Solution
Net decrease in cash:
Therefore, the net decrease in cash would be $30,000 instead of $80,000.
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Chapter 13 Solutions
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