Chapter 13, Problem 6PB

a.

To determine

Prepare a statement of cash flows for the current year using the direct method.

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 treasury stock

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 F technologies for the year ended December 31, 2018.

F 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	3,340,000
Interest received	65,000
Total cash receipts		3,405,000
Cash payments:
Cash paid to suppliers and employees	(2,334,000)
Interest paid	(23,000)
Income taxes paid	(125,000)
Total cash payments		(2,482,000)
Net cash provided operating activities		923,000
Cash flows from investing activities:
Purchase of marketable securities	(50,000)
Proceeds from sales of marketable securities	65,000
Loans made to borrowers	(30,000)
Collections on loan	27,000
Cash paid to acquire plant	(350,000)
Proceeds from sale of plant assets	22,000
Net cash used for investing activities		(316,000)
Cash flows from financing activities:
Proceeds from short-term borrowing	56,000
Payments to settle short-term debt	(70,000)
Proceeds from issuing common stock	160,000
Payment of dividend	(300,000)
Net cash used for financing activities		(154,000)
Net increase (decrease) in Cash		453,000
Cash and cash equivalents, January 1, 2018		20,000
Cash and cash equivalents, December 31, 2018		$473,000

Table (4)

Working notes:

Calculate the amount of cash receipts from customers.

$\begin{array}{c}\begin{array}{l}\text{Cash}\text{receipts}\text{from}\\ \text{Customers}\end{array}]=\text{Net sales }\left(\begin{array}{l}+\text{Decrease in Accounts Receivable}\\ \text{OR}\\ -\text{Increase in Accounts Receivable}\end{array}\right)\\ =\text{ Net sales }-\text{Increase in Accounts Receivable}\\ =\$3,400,000-\$60,000\\ =\$3,340,000\end{array}$

Calculate the amount of interest received.

$\begin{array}{c}\text{Interest received}]=\left\{\begin{array}{l}\text{Interest income }\\ \left(\begin{array}{l}+\text{Decrease in Interest Receivable}\\ \text{OR}\\ -\text{Increase in Interest Receivable}\end{array}\right)\end{array}\right\}\\ =\left[\begin{array}{l}\left(\text{Interest income }\right)\\ \text{+ Decrease in Accounts Receivable}\end{array}\right]\\ =\left[\$60,000+\text{ \$5,000}\right]\\ =\$65,000\end{array}$

Calculate the cash paid to supplier and employees.

Step 1: Calculate the amount of cash paid to suppliers of merchandise.

$\begin{array}{c}\left(\begin{array}{l}\text{Cash}\text{paid to }\text{suppliers}\\ \text{of merchandise}\end{array}\right)=\text{Cost of Goods Sold }\left(\begin{array}{l}+\text{Decrease in Accounts Payable}\\ \text{/}\text{Increase in Inventory}\\ \text{OR}\\ -\text{Increase in Accounts Payable }\\ \text{/}\text{Decrease in Inventory}\end{array}\right)\\ =\left(\begin{array}{l}\text{Cost of goods sold + Decrease in accounts payable}\\ -\text{ Decrease in inventory}\end{array}\right)\\ =\$1,500,000+\$22,000-\$30,000\\ =\$1,492,000\end{array}$

Step 2: Calculate the amount paid for operating expenses.

$\begin{array}{l}\left(\text{Cash}\text{paid to }\text{operating expenses}\right)=\left\{\begin{array}{l}\text{Operating expenses }-\text{Depreciation expenses }\\ \left(\begin{array}{l}+\text{Decrease in Accrued Operating}\\ \text{ Expenses Payable}\\ \text{/}\text{Increase in Short-Term Prepayment}\\ \text{OR}\\ -\text{Increase inAccrued Operating }\\ \text{Expenses PayablePayable }\\ \text{/}\text{Decrease in Short-Term Prepayment}\end{array}\right)\end{array}\right\}\\ =\left(\begin{array}{l}\text{Operating expenses }-\text{Depreciation expenses }\\ \text{+}\text{Decrease in accrued operating}\\ \text{ expenses payable + }\\ \text{Increase in Short-Term Prepayment}\end{array}\right)\\ =\left(\begin{array}{l}\text{\$900,000}-\$75,000\\ \text{+}\text{\$9,000 + \$8,000}\end{array}\right)\\ =\$842,000\end{array}$

Step 3: Calculate the amount of cash paid to supplier and employees.

$\begin{array}{c}\text{Cash paid to supplier and employees}=\left(\begin{array}{l}\text{Cash paid to suppliers of merchandise}\\ +\text{ Cash paid for operating expenses}\end{array}\right)\\ =\text{\$1,492,000}+\$842000\\ =\$2,334,000\end{array}$

Calculate the amount of cash paid for interest expenses.

$\begin{array}{c}\left(\begin{array}{l}\text{Cash paid for}\\ \text{interest expenses}\end{array}\right)=\left\{\begin{array}{l}\text{Interest expense}\\ \left(\begin{array}{l}+\text{Decrease in accrued expenses payable}\\ \text{OR}\\ -\text{Increase in accrued expenses payable}\end{array}\right)\end{array}\right\}\\ =\left(\begin{array}{l}\text{Interest expense }-\\ \text{Increase in accrued expenses payable}\end{array}\right)\\ \text{=}\left(\text{\$27,000 }-\$4,000\right)\\ =23,000\end{array}$

Calculate the amount of cash paid for income tax expenses:

$\begin{array}{c}\left(\begin{array}{l}\text{Cash paid }\\ \text{for Income taxes}\end{array}\right)=\text{Income tax expense}\left(\begin{array}{l}+\text{Decrease in income tax payable}\\ \text{OR}\\ -\text{Increase in income tax payable}\end{array}\right)\\ =\left(\text{Income tax expense + Decrease in income tax payable}\right)\\ \text{=}\left(\text{\$115,000 + }\$10,000\right)\\ =\$125,000\end{array}$

Calculate the amount of proceeds from sales of marketable securities.

$\begin{array}{c}\begin{array}{l}\text{Proceeds from sales of}\\ \text{marketable securities}\end{array}\}=\left(\begin{array}{l}\text{Cost of the marketable securities sold +}\\ \text{Gain reported on sales of marketable securities}\end{array}\right)\\ =\left(\$40,000+\$25,000\right)\\ =\$65,000\end{array}$

Calculate the amount of proceeds from sales of plant assets.

$\begin{array}{c}\begin{array}{l}\text{Proceeds from sales }\\ \text{of plant assets}\end{array}\}=\left(\begin{array}{l}\text{Book value of the plant assets sold }-\\ \text{Loss reported on sales of plant assets}\end{array}\right)\\ =\left(\$30,000-\$8,000\right)\\ =\$22,000\end{array}$

Calculate the amount of proceeds from issuing capital stock.

$\begin{array}{c}\begin{array}{l}\text{Proceeds from }\\ \text{issuing capital stock}\end{array}\}=\left(\begin{array}{l}\text{Amount credited to capital account+}\\ \text{Amount credited to additional}\\ \text{ paid-in capital account}\end{array}\right)\\ =\left(\$60,000+\$100,000\right)\\ =\$160,000\end{array}$

b.

To determine

Explain why cash paid to suppliers is higher than cost of goods sold.

Explanation of Solution

The total amount of cash paid to suppliers is $2,334,000 and the given cost of goods sold is $1,500,000.

The following are the primary reason for the differences:

For the calculation of cash paid to suppliers the below adjustments are included.

• Decrease in inventory.
• Decrease in accounts payable.
• Depreciation expense
• Increase in prepaid operating expenses
• Decrease in accrued liabilities for operating expenses.

c.

To determine

Indicate F Company is in a weak cash position (if cash flows from investing and financing activities are negative).

Explanation of Solution

In fact, the negative cash flows from investing and financing activities indicate that the company is in a strong cash position. In 2018, the beginning balance of cash is $20,000 and at the end of the period, the cash balance is increased significantly an amount of $473,000. The major reason is the operating cash flows show a positive amount of $923,000. Therefore, it indicates that the company has a cash to meet the capital expenditures (investing activities) and make loans to borrower and pay the dividend to stockholders (financing activities).