Chapter 16, Problem 16QS

To determine

Prepare the cash provided or used from operating activities using 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.

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.

C Incorporation
Statement of Cash Flows- Direct Method (Partial)
For the year ended December 31, 2015
Details	Amount ($)	Amount ($)
Cash flows from operating activities:
Cash receipt from customer		498,000
Less: Cash payments:
Payment for inventory	310,000
Payment for other expenses	86,300
Payment for taxes	18,500	414,800
Net cash provided by operating activities		$83,200

Table (1)

Working notes:

The amount of cash receipts from customers.

Step 1: Calculate the change in accounts receivable:

$\begin{array}{c}\text{Change in accounts receivable}=\left(\begin{array}{l}\text{Ending balance}\\ -\text{Beginning balance}\end{array}\right)\\ =\text{\$41,000}-\$51,000\\ =\$10,000\left(\text{Decrease}\right)\end{array}$

Step 2: The Calculate the amount of cash receipts from customers.

$\begin{array}{c}\begin{array}{l}\text{Cash}\text{receipts}\text{from}\\ \text{Customers}\end{array}]=\text{Sales}\text{revenue }\left(\begin{array}{l}+\text{Decrease in Accounts Receivable}\\ \text{OR}\\ -\text{Increase in Accounts Receivable}\end{array}\right)\\ =\text{ Sales Revenue + Decrease in Accounts Receivable}\\ =\$488,000+\$10,000\\ =\$498,000\end{array}$

Determine the cash paid for other expenses during 2015.

Step 1: Calculate the change in wages payable and prepaid expenses:

Schedule in the changes of assets and liabilities
Particulars	Amount
	Current year  (December 31, 2015) (1)	Previous year (December 31, 2014) (2)	Increase/(Decrease) $(1)-(2)$
Wages payable	$9,000	$5,000	$4,000
Prepaid expense	$5,400	$4,200	$1,200

Table (2)

Step 2: The Calculate the amount of cash paid for other expenses

$\begin{array}{c}\text{Cash paid for other expense}=\left[\begin{array}{l}\text{Other Operating expenses}\\ +\left(\begin{array}{l}\text{Increase in }\\ \text{prepaid expense}\end{array}\right)-\left(\begin{array}{l}\text{Increase in }\\ \text{wages payable}\end{array}\right)\end{array}\right]\\ =\left[\$89,100+\$1,200-\$4,000\right]\\ =\$86,300\end{array}$

Calculate the amount of cash paid for income taxes:

Step 1: Calculate the change in income taxes:

$\begin{array}{c}\text{Change in income taxes}=\left(\begin{array}{l}\text{Ending balance}\\ -\text{Beginning balance}\end{array}\right)\\ =\text{\$1,400}-\$2,600\\ =\$1,200\left(\text{Decrease}\right)\end{array}$

Step 2: The Calculate the amount of cash paid for income taxes.

$\begin{array}{c}\begin{array}{l}\text{Cash paid for}\\ \text{Income taxes}\end{array}]=\left\{\begin{array}{l}\text{Income tax expense}\\ \left(\begin{array}{l}\text{+Decrease in income taxpayable}\\ \text{/Decrease deferred tax liability}\\ \text{OR}\\ -\text{Increase in income tax payable}\\ \text{/Increase in deferred tax liability}\end{array}\right)\end{array}\right\}\\ =\left(\begin{array}{l}\text{Income tax expense }\\ \text{+Decrease in income tax payable}\end{array}\right)\\ =\$17,300+\$1,200\\ =\$18,500\end{array}$

Conclusion

Hence, the cash provided or used from operating activities using direct method is $83,200.