Chapter 16, Problem 16.21EX

Determining selected amounts for cash flows from operating activities—direct method

Selected data taken from the accounting records of Ginis Inc. for the current year ended December 31 are as follows:

	Balance, December 31	Balance, January 1
Accrued expenses payable (operating expenses)	$ 12,650	$ 14,030
Accounts payable (merchandise creditors)	96,140	105,800
Inventories	178,020	193,430

During the current year, the cost of merchandise sold was $1,031,550 and the operating expenses other than depreciation were $179,400. The direct method is used for presenting the cash flows from operating activities on the statement of cash flows.

Determine the amount reported on the statement of cash flows for (a) cash payments for merchandise and (b) cash payments for operating expenses.

To determine

Statement of cash flows: It is one of the financial statement that shows the cash and cash equivalents of a company for a particular period. It determines the net changes in cash through reporting the sources and uses of cash due to the operating, investing, and financing activities of a company.

Direct method: This method uses the basis of cash for preparing the cash flows statement.

Cash flows from operating activities: In this direct method, cash flow from operating activities is computed by using all cash receipts and cash payments during the year.

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

To Determine: The amount of cash paid for merchandise.

Answer to Problem 16.21EX

$\begin{array}{c}\text{Cash paid for merchandise}=\left[\begin{array}{c}\text{Cost of Goods Sold}\\ \left(\begin{array}{l}+\text{Decrease in Accounts Payable}\\ \text{/Increase in Inventory}\\ \text{OR}\\ -\text{Increase in Accounts Payable}\\ \text{ /Decrease in Inventory}\end{array}\right)\end{array}\right]\\ =\left(\begin{array}{c}\text{Cost of goods sold }\\ \text{+ Decrease in} \text{Accounts Payable }\\ -\text{Decrease in Inventory}\end{array}\right)\\ =1,031,550+\$9,660-\$15,410\\ =\$1,025,800\end{array}$

Therefore, the amount of cash paid for merchandise is $1,025,800.

Explanation of Solution

Cash payments for purchase represents the total amount of cash paid for the purchase as well as to the accounts payable.

Therefore, the amount of cash paid for merchandise is $1,025,800.

Working notes:

Calculate increase or decrease in merchandise inventories:

$\begin{array}{c}\begin{array}{l}\text{Increase or decrease in}\\ \text{merchandise inventories}\end{array}\}=\left(\begin{array}{l}\text{Beginning balance}\\ \text{ - Ending balance}\end{array}\right)\\ =\left(\begin{array}{l}\$193,430-\\ \$178,020\end{array}\right)\\ =\$15,410\left(\text{Decrease}\right)\end{array}$

Calculate increase or decrease in accounts payable:

$\begin{array}{c}\begin{array}{l}\text{Increase or decrease }\\ \text{in accounts payable}\end{array}\}=\left(\begin{array}{l}\text{Beginning balance}\\ \text{ - Ending balance}\end{array}\right)\\ =\left(\$105,800-\$96,140\right)\\ =\$9,660\left(\text{Decrease}\right)\end{array}$

To determine

The amount of cash paid for operating expenses.

Answer to Problem 16.21EX

$\begin{array}{c}\begin{array}{l}\text{Cash paid for }\\ \text{operating expenses}\end{array}\}=\left[\begin{array}{l}\text{Operating expenses other than depreciation}\\ \left(\begin{array}{l}+\text{Decrease in accrued expense payable}\\ \text{OR}\\ -\text{Increase in accrued expense}\text{tax payable}\end{array}\right)\end{array}\right]\\ =\left(\begin{array}{l}\text{Operating expenses other }\\ \text{than depreciation}\text{+ Decrease}\\ \text{ in iaccrued expense payable}\end{array}\right)\\ =\left(\$179,400+\$1,380\right)\\ =\$180,780\end{array}$

Therefore, the amount of cash paid for operating expenses is $180,780.

Explanation of Solution

Cash payments for accrued expense represent the total amount of cash paid for the operating expense as well as to the accrued expense payable.

Therefore, the amount of cash paid for operating expenses is $180,780.

Working note:

Calculate increase or decrease in operating expenses / accrued expense payable:

$\begin{array}{c}\begin{array}{l}\text{Increase or decrease in operating }\\ \text{expenses/accrued expense payable}\end{array}\}=\left(\begin{array}{l}\text{Beginning balance}\\ \text{ - Ending balance}\end{array}\right)\\ =\left(\begin{array}{l}\$14,030-\\ \$12,650\end{array}\right)\\ =\$1,380\left(\text{Decrease}\right)\end{array}$