Chapter 16, Problem 2AP

Refer to the information in Problem 16-1A.

Required

Prepare the operating activities section of the statement of cash flows using the direct method for the current year.

To determine

Prepare the operating activities section of the statement of cash flows using the direct method for the current year.

Explanation of Solution

Statement of cash flows: This statement 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.

Operating activities: Operating activities include cash inflows and outflows from business operations.

Direct method: Under direct method, cash receipts from customers (cash inflows) and cash payments to suppliers (cash outflows) are reported under the operating activities.

Prepare the operating activities section of the statement of cash flows using the direct method for the current year.

Company L
Statement of Cash Flows (partial)-Direct Method
For the Year Ended December 31
Details	Amount ($)	Amount ($)
Cash flows from operating activities:
Cash receipts from customer (1)	97,400
Total cash receipts		97,400
Cash payments to suppliers(2)	(42,640)
Cash payments for salaries(3)	(17,820)
Cash payments for rent(4)	(9,040)
Cash payments for insurance(5)	(3,780)
Cash payments for utilities(6)	(2,740)
Cash payments for interest	(3,600)
Total cash payments		(79,620)
Net cash provided by operating activities		$17,780

Table (2)

Working note:

1. Calculate the amount of cash receipts from customers:

Calculate the amount of change in accounts receivable:

$\begin{array}{c}\text{Change in accounts receivable}=\left(\begin{array}{l}\text{Accounts receivable in current year}\\ -\text{Accounts receivable in prior year}\end{array}\right)\\ =\text{\$5,600}-\$5,800\\ =\$200\left(\text{Decrease}\right)\end{array}$

Calculate the amount of cash receipt from customer:

$\begin{array}{c}\begin{array}{l}\text{Cash}\text{receipts}\text{from}\\ \text{Customers}\end{array}]=\text{ Sales Revenue +Decrease in Accounts Receivable}\\ =\$97,200+\$200\\ =\$97,400\end{array}$ (1)

2. Calculate the amount of cash payments to suppliers:

Calculate the amount of change in inventory:

$\begin{array}{c}\text{Change in inventory=}\left(\begin{array}{l}\text{Inventory in current year}\\ -\text{Inventory in prior year}\end{array}\right)\\ =\text{\$1,980}-\$1,540\\ =\$440\left(\text{Increase}\right)\end{array}$

Calculate the amount of change in accounts payable:

$\begin{array}{c}\text{Change in accounts payable}=\left(\begin{array}{l}\text{Accounts payable in current year}\\ -\text{Accounts payable in prior year}\end{array}\right)\\ =\text{\$4,400}-\$4,600\\ =\$200\left(\text{Decrease}\right)\end{array}$

Calculate the amount of cash payments to suppliers.

$\begin{array}{c}\left(\begin{array}{l}\text{Cash}\text{paid }\\ \text{to }\text{suppliers}\end{array}\right)=\left(\begin{array}{l}\text{Cost of goods sold + Decrease in accounts payable}\\ \text{ + Increase in inventory}\end{array}\right)\\ =\$42,000+\$440+\$200\\ =\$42,640\end{array}$ (2)

3. Calculate the amount of cash paid for salaries expenses:

Calculate the change in salaries payable.

$\begin{array}{c}\text{Change in salaries payable =}\left(\begin{array}{l}\text{Salaries payable in current year}\\ -\text{Salaries payable in prior year}\end{array}\right)\\ =\text{\$880}-\$700\\ =\$180\left(\text{Increase}\right)\end{array}$

Calculate the amount of cash paid for salaries payable.

$\begin{array}{c}\left(\begin{array}{l}\text{Cash paid }\\ \text{for salaries}\end{array}\right)=\left(\text{Salaries expense}-\text{Increase in salaries payable}\right)\\ \text{=}\left(\text{\$18,000}-\$180\right)\\ =\$17,820\end{array}$ (3)

4. Calculate the amount of cash paid for rent expenses:

Calculate the amount of change in prepaid rent.

$\begin{array}{c}\text{Change in prepaid rent =}\left(\begin{array}{l}\text{Prepaid rent in current year}\\ -\text{Prepaid rent in prior year}\end{array}\right)\\ =\text{\$220}-\$180\\ =\$40\left(\text{Increase}\right)\end{array}$

Calculate the amount of cash paid for rent expenses.

$\begin{array}{c}\left(\begin{array}{l}\text{Cash paid for }\\ \text{rent expenses}\end{array}\right)=\left(\text{Rent expense}-\text{Increase in prepaid rent}\right)\\ \text{=}\left(\text{\$9,000 + }\$40\right)\\ =\$9,040\end{array}$ (4)

5. Calculate the amount of cash paid for insurance expenses:

Calculate the change in prepaid insurance.

$\begin{array}{c}\text{Change in prepaid insurance =}\left(\begin{array}{l}\text{Prepaid insurance in current year}\\ -\text{Prepaid insurance in prior year}\end{array}\right)\\ =\text{\$260}-\$280\\ =\$20\left(\text{Decrease}\right)\end{array}$

Calculate the amount of cash paid for insurance expenses.

$\begin{array}{c}\left(\begin{array}{l}\text{Cash paid for }\\ \text{insurance expenses}\end{array}\right)=\left(\text{Insurance expense}-\text{Decrease in prepaid insurance}\right)\\ \text{=}\left(\text{\$3,800}-\$20\right)\\ =\$3,780\end{array}$ (5)

6. Calculate the amount of cash paid for utilities expenses:

Calculate the change in utilities payable.

$\begin{array}{c}\text{Change in utilities payable =}\left(\begin{array}{l}\text{Utilities payable in current year}\\ -\text{Utilities payable in prior year}\end{array}\right)\\ =\text{\$220}-\$160\\ =\$60\left(\text{Increase}\right)\end{array}$

Calculate the amount of cash paid for utilities expense.

$\begin{array}{c}\left(\begin{array}{l}\text{Cash paid for}\\ \text{ utilities expense}\end{array}\right)=\left(\text{Utilities expense}-\text{Increase in utilities payable}\right)\\ \text{=}\left(\text{\$2,800}-\$60\right)\\ =\$2,740\end{array}$ (6)