
Concept Introduction:
The operating activities are the revenue generating activities of the business. The cash flow related to these activities are cash received from customers, cash paid for inventory, cash paid for other expenses, cash paid for income taxes etc. When cash receipts and cash payments are used for calculating cash flow from operating activities, this method is termed as direct method.
To prepare:
Cash flow from operating activities section using direct method

Answer to Problem 16QS
Solution:
The cash flow from operating activities section using direct method is −
CRUZ, INC. | |||
Cash Flow from operating activities(Using Direct Method) | |||
For the year Ended December 31, 2015 | |||
Cash Flow from operating activities | |||
Receipts | |||
Cash received from customers | 4,98,000 | ||
Less: Payments | |||
Cash paid to acquire inventory | 3,10,000 | ||
Cash paid for other expenses | 86,300 | ||
Cash paid for income tax | 18,500 | ||
Total cash payments | 4,14,800 | ||
Cash Flow from operating activities | 83,200 |
Explanation of Solution
The cash flow from operating activities using direct method is prepared as under −
First, the receipts are calculated.
The cash received from sale of customers for the year 2015 is calculated as under −
Given,
- Sales for the year = $ 488,000
Accounts receivables for 2014 = $ 51,000- Accounts receivables for 2015 = $ 498,000
The cash received from sale to customers for the year 2015 = $ 498,000
Next, cash payments for the year will be calculated.
There are three cash payments during the year related to operating activities −
- Cash paid to acquire inventory
- Cash paid for operating activities
- Cash paid for Income taxes.
1. Cash paid to acquire inventory −
The cash paid to acquire inventory during the year 2015 will be calculated as under −
Given,
- Cost of goods sold for the year 2015 = $ 314,000
- Inventory for 2015 = $ 85,800
- Inventory for 2014 = $ 95,800
The purchases for the year = $ 304,000
Now, the cash paid to acquire inventory will be calculated as under −
Given,
- Purchases for the year = $ 304,000
- Accounts Payable for 2014 = $ 21,000
- Accounts payable for 2015 = $ 15,000
The cash paid to acquire inventory for 2015 = $ 310,000.
2. Cash paid for other expenses −
The cash paid for operating expenses for 2015 will be calculated as under −
Given,
- Other expenses = $ 89,100
- Prepaid expenses for 2014 = $ 4,200
- Prepaid expenses for 2015 = $ 5,400
- Wages payable in 2014 = $ 5,000
- Wages payable in 2015 = $ 9,000
The cash paid for operating expenses for 2015 = $ 86,300.
3. Cash paid for Income tax expense −
The cash paid for Income tax expense will be calculated as under −
Given,
- Income tax expense for the year 2015 = $ 17,300
- Income Tax Payable for 2015 = $ 1,400
- Income Tax Payable for 2014 = $ 2,600
The cash paid for income taxes = $ 18,500.
Now, the total cash payments will be calculated as under −
Now, cash flow from operating activities will be calculated as −
The cash flow from operating activities = $ 83,200.
Thus, the cash flow from operating activities section using direct method has been prepared.
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Chapter 16 Solutions
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