
Statement of
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.
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.
Cash Receipts: It encompasses all the cash receipts from sale of goods and on account receivable.
Cash Payments: It encompasses all the cash payments that are made to suppliers of goods and all expenses that are paid.
The below table shows the way of calculation of cash flows from operating activities:
Cash flows from operating activities (Direct method) |
Add: Cash receipts. |
Cash receipt from customer |
Less: Cash payments: |
To supplier |
For operating expenses |
Income tax expenses |
Net cash provided from or used by operating activities |
Table (1)
To Prepare: The cash flows from operating activities section of the statement of cash flows using direct method.

Answer to Problem 14.23EX
R Company | ||
Statement of Cash Flows - Direct Method (Partial) | ||
Year Ended June 30 | ||
Details | Amount ($) | Amount ($) |
Cash flows from operating activities: | ||
Add: Cash receipt: | ||
Cash received from customers | 440,440 | |
Total cash receipt | 440,440 | |
Less: Cash payments: | ||
Cash payment for merchandise | (161,260) | |
Cash payment for operating expenses | (115,720) | |
Cash payment for income taxes | (39,600) | |
Total cash payments | (316,580) | |
Net cash provided by operating activities | $123,860 |
Explanation of Solution
Working notes:
Calculate the amount of cash received from customers:
(Cash received from customers)=[Sales revenue (+Decrease in Accounts Receivable OR − Increase in Accounts Receivable)]=(Sales revenue − Increase in Accounts Receivable)=($445,500−$5,060[31,240−36,300])=$440,440
Calculate the amount of cash paid for merchandise:
Cash paid for merchandise=[Cost of Goods Sold (+Decrease in Accounts Payable/Increase in Inventory OR − Increase in Accounts Payable /Decrease in Inventory)]=(Cost of goods sold − Increase in
Calculate the amount of cash paid for operating expenses:
Therefore, the net cash provided by operating activities under direct method is $123,860.
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Chapter 14 Solutions
Working Papers, Volume 1, Chapters 1-15 for Warren/Reeve/Duchac's Corporate Financial Accounting, 13th + Financial & Managerial Accounting, 13th
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