Chapter 16, Problem 17E

To determine

Prepare the statement of cash flows for the year ended June 30, 2019.

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.

Prepare the statement of cash flows using the direct method for the year ended June 30, 2019:

Table (1)

Working notes:

The amount of cash receipts from customers.

Step 1: Calculate the change in accounts receivable.

$\begin{array}{c}\text{Change in accounts receivable}=\left(\begin{array}{l}\text{Ending balance}\\ -\text{Beginning balance}\end{array}\right)\\ =\text{\$65,000}-\$51,000\\ =\$14,000\left(\text{Increase}\right)\end{array}$

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

$\begin{array}{c}\begin{array}{l}\text{Cash}\text{receipts}\text{from}\\ \text{Customers}\end{array}]=\text{Sales}\text{revenue }\left(\begin{array}{l}+\text{Decrease in Accounts Receivable}\\ \text{OR}\\ -\text{Increase in Accounts Receivable}\end{array}\right)\\ =\text{ Sales Revenue }-\text{Increase in Accounts Receivable}\\ =\$678,000-\$14,000\\ =\$664,000\end{array}$

Calculate the cash payments to suppliers.

Step 1: Calculate the change in inventory.

$\begin{array}{c}\text{Change in inventory=}\left(\begin{array}{l}\text{Ending balance}\\ -\text{Beginning balance}\end{array}\right)\\ =\text{\$63,800}-\$86,500\\ =\$22,700\left(\text{Decrease}\right)\end{array}$

Step 2: Calculate the change in accounts payable.

$\begin{array}{c}\text{Change in accounts payable}=\left(\begin{array}{l}\text{Ending balance}\\ -\text{Beginning balance}\end{array}\right)\\ =\text{\$25,000}-\$30,000\\ =\$5,000\left(\text{Decrease}\right)\end{array}$

Step 3: Calculate the amount of cash payments to suppliers.

$\begin{array}{c}\left(\begin{array}{l}\text{Cash}\text{paid }\\ \text{to }\text{suppliers}\end{array}\right)=\text{Cost of Goods Sold }\left(\begin{array}{l}+\text{Decrease in Accounts Payable}\\ \text{/}\text{Increase in Inventory}\\ \text{OR}\\ -\text{Increase in Accounts Payable }\\ \text{/}\text{Decrease in Inventory}\end{array}\right)\\ =\left(\begin{array}{l}\text{Cost of goods sold + Decrease in accounts payable}\\ -\text{ Decrease in inventory}\end{array}\right)\\ =\$411,000+\$5,000-\$22,700\\ =\$393,300\end{array}$

Calculate the amount of cash paid for other operating expenses:

Step 1: Calculate the change in prepaid expenses.

$\begin{array}{c}\text{Change in prepaid expenses =}\left(\begin{array}{l}\text{Ending balance}\\ -\text{Beginning balance}\end{array}\right)\\ =\text{\$4,400}-\$5,400\\ =\$1,000\left(\text{Decrease}\right)\end{array}$

Step 2: Calculate the change in wages payable.

$\begin{array}{c}\text{Change in wages payable}=\left(\begin{array}{l}\text{Ending balance}\\ -\text{Beginning balance}\end{array}\right)\\ =\text{\$6,000}-\$15,000\\ =\$9,000\left(\text{Decrease}\right)\end{array}$

Step 3: Calculate the amount of cash paid for other operating expenses.

$\begin{array}{c}\left(\begin{array}{l}\text{Cash payments for }\\ \text{Operating expenses}\end{array}\right)=\left\{\begin{array}{l}\text{Operating expenses}\\ \left[\begin{array}{c}\left(\begin{array}{l}\text{+Increase in prepaid of insurance}\\ \text{/Decrease in other }\\ \text{accrued liabilities}\end{array}\right)\\ \text{ OR}\\ \left(\begin{array}{l}-\text{Decrease in prepaid insurance}\\ \text{/Increase in accrued expense payable}\end{array}\right)\end{array}\right]\end{array}\right\}\\ =\left[\begin{array}{l}\text{Operating expenses}-\\ \text{Decrease in prepaid expenses }\\ \text{+Decrease in wages payable}\end{array}\right]\\ ==\$67,000-\$1,000+\$9,000\\ =\$75,000\end{array}$

Calculate the amount of cash paid for income tax expenses:

Step 1: Calculate the change in income taxes payable.

$\begin{array}{c}\text{Change in income taxes payable =}\left(\begin{array}{l}\text{Ending balance}\\ -\text{Beginning balance}\end{array}\right)\\ =\text{\$3,400}-\$3,800\\ =\$400\left(\text{Decrease}\right)\end{array}$

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

$\begin{array}{c}\left(\begin{array}{l}\text{Cash paid }\\ \text{for Income taxes}\end{array}\right)=\text{Income tax expense}\left(\begin{array}{l}+\text{Decrease in income tax payable}\\ \text{OR}\\ -\text{Increase in income tax payable}\end{array}\right)\\ =\left(\text{Income tax expense + Decrease in income tax payable}\right)\\ \text{=}\left(\text{\$43,890 + }\$400\right)\\ =\$44,290\end{array}$

Calculate the cash receipt from sale of equipment:

Details	Amount ($)	Amount ($)
Cost of equipment sold	48,600
Less: Accumulated depreciation	(40,600)
Book value of equipment		8,000
Gain on sale of equipment		2,000
Cash receipt from sale of equipment		$10,000

Table (2)

Calculate the amount of cash paid for new equipment:

$\begin{array}{c}\text{Cash paid for new equipment = }\left(\begin{array}{l}\text{Cost of equipment sold +}\\ \text{ Net increase in the equipment account balance}\end{array}\right)\\ \text{=}\left(\text{\$48,600 + }\$9,000\right)\\ =\$57,600\end{array}$

Calculate the amount of dividend paid:

$\begin{array}{c}\text{Retained earning in 2017 = }\left(\begin{array}{l}\text{Retained earning in 2016 +}\\ \text{ Net income}-\text{Dividends}\end{array}\right)\\ \text{\$33,300 = \$24,100}\text{}+\$99,510-\text{Dividend}\\ \text{Dividend}=\text{\$24,100}\text{}+\$99,510-\$33,300\\ =\$123,610-\$33,300\\ =\$90,310\end{array}$