Chapter 16, Problem 2BP

To determine

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

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.

Cash flows from operating activities: Cash flows from operating activity represent the net cash flows from the general operation of the business by comparing the cash receipt and cash payments.

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

Company S
Statement of Cash Flows (partial)-Direct Method
For the current year ended, December 31
Details	Amount ($)	Amount ($)
Cash flows from operating activities:
Cash receipts from customers (1)	155,400
Total cash receipts		155,400
Cash payments to suppliers (2)	(72,080)
Cash payments for salaries (3)	(19,700)
Cash payments for rent (4)	(4,900)
Cash payments for insurance (5)	(2,560)
Cash payments for utilities (6)	(1,800)
Cash payments for interest	(2,400)
Total cash payments		(103,440)
Net cash provided by operating activities		$51,960

Table (1)

Working notes:

1. Calculate the amount of cash receipts from customers:

Calculate the amount of change in accounts receivable:

$\begin{array}{c}\text{Change in accounts receivable}=\left(\begin{array}{l}\text{Accounts receivable in current year}\\ -\text{Accounts receivable in prior year}\end{array}\right)\\ =\text{\$3,600}-\$3,000\\ =\$600\left(\text{Increase}\right)\end{array}$

Calculate the amount of cash receipt from customer:

$\begin{array}{c}\begin{array}{l}\text{Cash}\text{receipts}\text{from}\\ \text{Customers}\end{array}]=\text{ Sales Revenue }-\text{Increase in Accounts Receivable}\\ =\$156,000-\$600\\ =\$155,400\end{array}$ (1)

2. Calculate the amount of cash payments to suppliers:

Calculate the amount of change in inventory:

$\begin{array}{c}\text{Change in inventory=}\left(\begin{array}{l}\text{Inventory in current year}\\ -\text{Inventory in prior year}\end{array}\right)\\ =\text{\$980}-\$560\\ =\$420\left(\text{Decrease}\right)\end{array}$

Calculate the amount of change in accounts payable:

$\begin{array}{c}\text{Change in accounts payable}=\left(\begin{array}{l}\text{Accounts payable in current year}\\ -\text{Accounts payable in prior year}\end{array}\right)\\ =\text{\$2,600}-\$2,400\\ =\$200\left(\text{Decrease}\right)\end{array}$

Calculate the amount of cash payments to suppliers.

$\begin{array}{c}\left(\begin{array}{l}\text{Cash}\text{paid }\\ \text{to }\text{suppliers}\end{array}\right)=\left(\begin{array}{l}\text{Cost of goods sold }+\text{Decrease in accounts payable}\\ -\text{Decrease in inventory}\end{array}\right)\\ =\$72,000+\$420-\$200\\ =\$72,080\end{array}$ (2)

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

Calculate the change in salaries payable.

$\begin{array}{c}\text{Change in salaries payable =}\left(\begin{array}{l}\text{Salaries payable in current year}\\ -\text{Salaries payable in prior year}\end{array}\right)\\ =\text{\$}900-\$600\\ =\$300\left(\text{Increase}\right)\end{array}$

Calculate the amount of cash paid for salaries payable.

$\begin{array}{c}\left(\begin{array}{l}\text{Cash paid }\\ \text{for salaries}\end{array}\right)=\left(\text{Salaries expense}-\text{Increase in salaries payable}\right)\\ \text{=}\left(\text{\$20,000}-\$300\right)\\ =\$19,700\end{array}$ (3)

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

Calculate the amount of change in prepaid rent.

$\begin{array}{c}\text{Change in prepaid rent =}\left(\begin{array}{l}\text{Prepaid rent in current year}\\ -\text{Prepaid rent in prior year}\end{array}\right)\\ =\text{\$200}-\$100\\ =\$100\left(\text{Increase}\right)\end{array}$

Calculate the amount of cash paid for rent expenses.

$\begin{array}{c}\left(\begin{array}{l}\text{Cash paid for }\\ \text{rent expenses}\end{array}\right)=\left(\text{Rent expense}-\text{Decrease in prepaid rent}\right)\\ \text{=}\left(\text{\$5,000 }-\$100\right)\\ =\$4,900\end{array}$ (4)

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

Calculate the change in prepaid insurance.

$\begin{array}{c}\text{Change in prepaid insurance =}\left(\begin{array}{l}\text{Prepaid insurance in current year}\\ -\text{Prepaid insurance in prior year}\end{array}\right)\\ =\text{\$180}-\$140\\ =\$40\left(\text{Increase}\right)\end{array}$

Calculate the amount of cash paid for insurance expenses.

$\begin{array}{c}\left(\begin{array}{l}\text{Cash paid for }\\ \text{insurance expenses}\end{array}\right)=\left(\text{Insurance expense}-\text{Decrease in prepaid insurance}\right)\\ \text{=}\left(\text{\$2,600}-\$40\right)\\ =\$2,560\end{array}$ (5)

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

Calculate the change in utilities payable.

$\begin{array}{c}\text{Change in utilities payable =}\left(\begin{array}{l}\text{Utilities payable in current year}\\ -\text{Utilities payable in prior year}\end{array}\right)\\ =\text{\$}200-\$0\\ =\$200\left(\text{Increase}\right)\end{array}$

Calculate the amount of cash paid for utilities expense.

$\begin{array}{c}\left(\begin{array}{l}\text{Cash paid for}\\ \text{ utilities expense}\end{array}\right)=\left(\text{Utilities expense}-\text{Increase in utilities payable}\right)\\ \text{=}\left(\text{\$2,000}-\$200\right)\\ =\$1,800\end{array}$ (6)