Chapter 16, Problem 3GLP

To determine

Concept Introduction:

Cash flow statement:

Cash flow statement is one of the financial statements which shows the cash flows of the company during a given period of time.
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 statement using direct method

Answer to Problem 3GLP

Solution:

The cash flow from statement using direct method −

Golden Corp.
Statement of cash flows
FOR THE year ended December 31, 2015
Particulars	Amount ($)	Amount ($)
Cash flows from operating activities
Receipts:
Cash receipts from customers		1,780,000
Payments:
Cash paid for merchandise	1,145,000
Cash paid for other expenses	494,000
Cash paid for income taxes	19,000
Total cash payments		(1,658,000)
Net cash provided by operating activities		122,000
Cash flows from investing activities
Cash paid for equipment purchase	(36,000)
Net cash used in investing activities		(36,000)
Cash flows from financing activities
Cash received from issuing stock	60,000
Cash paid for dividends	(89,000)
Net cash used in financing activities		(29,000)
Net increase in cash		57,000
Beginning cash balance		107,000
Ending cash balance		164,000

Explanation of Solution

1. Cash flow from operating activities-
First, the receipts are calculated.
Cash receipts from customers

Given,

• Sales for the year = $ 1,792,000
• Accounts receivables for 2014 = $ 71,000
• Accounts receivables for 2015 = $ 83,000

  $\begin{array}{l}Cashreceivedfromcustomers=\left(\begin{array}{l}Accountsreceivablesfor2014\\ +Salesfortheyear\end{array}\right)-Accountsreceivablesfor2015\hfill \\ Cashreceivedfromcustomers=\left(\$71,000+\$1,792,000\right)-\$83,000\hfill \\ Cashreceivedfromcustomers=\$1,780,000\hfill \end{array}$

Next, cash payments for the year will be calculated.
There are three cash payments during the year related to operating activities-

1. Cash paid for merchandise
2. Cash paid for other expenses
3. Cash paid for income taxes
These payments will be calculated as under-

Cash paid for merchandise
Given,

• Cost of goods sold = $1,086,000
• Accounts payables for 2014 = $71,000
• Accounts payables for 2015 = $87,000
• Inventory for 2014 = $526,000
• Inventory for 2015 = $601,000

  $\begin{array}{l}\begin{array}{l}Cashpaidformerchandise=Costofgoodssold+Increaseininventory-Increaseinpayables\hfill \\ Cashpaidformerchandise=\$1,086,000+\left(\$601,000-\$526,000\right)-\left(\$87,000-\$71,000\right)\hfill \\ Cashpaidformerchandise=\$1,086,000+\$75,000-\$16,000\hfill \end{array}\\ Cashpaidformerchandise=\$1,145,000\end{array}$

• Cash paid for other expenses
  
Given,

• Other expenses = $494,000

  $\begin{array}{l}\begin{array}{l}Cashpaidforotherexpenses=OtherExpenses–Decreaseinprepaidexpenses\hfill \\ Cashpaidforotherexpenses=\$494,000–0\hfill \\ Cashpaidforotherexpenses=\$494,000\hfill \end{array}\\ \end{array}$

• Cash paid for income taxes
  
Given,

• Income tax = $22,000
• Income taxes payable for 2014= $25,000
• Income taxes payable for 2015=$28,000

  $\begin{array}{l}Cashpaidforincometaxes=Incometaxexpense-Increaseinincometaxpayable\hfill \\ Cashpaidforincometaxes=\$22,000-\left(\$28,000-\$25,000\right)\hfill \\ Cashpaidforincometaxes=\$22,000-\$3,000\hfill \\ Cashpaidforincometaxes=\$19,000\hfill \end{array}$

Now, the total cash payments will be calculated as under −

  $\begin{array}{l}Totalpayments=Cashpaidformerchandise+Cashpaidforotherexpenses+Cashpaidforincometaxes\hfill \\ Totalpayments=\$1,145,000+\$494,000+19,000\hfill \\ Totalpayments=\$1,658,000\hfill \end{array}$

Now, cash flow from operating activities will be calculated as −

  $\begin{array}{l}\begin{array}{l}Cashflowfromoperatingactivities=Totalreceipts–Totalpayments\hfill \\ Cashflowfromoperatingactivities=\$1,780,000-\$1,658,000\hfill \end{array}\\ Cashflowfromoperatingactivities=\$122,000\end{array}$

The cash flow from operating activities = $122,000.

Cash flow from investing activities-

Given,

• Cash paid for equipment purchase = $36,000
The cash used in investing activities = ($36,000).<

Cash flow from financing activities-

Given,

• Cash paid for dividends= $89,000

Cash received from issuing stock is calculated as under-

  $\begin{array}{l}Cashreceivedfromissuingstock=No.ofshares\times Pricepershare\hfill \\ Cashreceivedfromissuingstock=12,000shares\times \$5\hfill \\ Cashreceivedfromissuingstock=\$60,000\hfill \end{array}$

Now, cash flow from financing activities will be calculated as −

  $\begin{array}{l}\begin{array}{l}Cashusedinfinancingactivities=Cashreceivedfromissuingstock-Cashpaidfordividends\hfill \\ Cashusedinfinancingactivities=\$60,000-\$89,000\hfill \end{array}\\ Cashusedinfinancingactivities=\left(\$29,000\right)\end{array}$

The cash used in financing activities = ($29,000).
Now, we need to calculate net increase/ (decrease in cash)-

  $\begin{array}{l}\begin{array}{l}Netincreaseincash=Cashflowsfromoperatingactivities-Cashusedininvestingactivities\\ -Cashusedinfinancingactivities\end{array}\hfill \\ Netincreaseincash=\$122,000-\$36,000-\$29,000\hfill \\ Netincreaseincash=\$57,000\hfill \end{array}$

Last step is to calculate Ending cash balance-
Given,

• Cash balance for 2014=$107,000

  $\begin{array}{l}Endingcashbalance=Netincreaseincash+Cashbalancefor2014\hfill \\ Endingcashbalance=\$57,000+\$107,000\hfill \\ Endingcashbalance=\$164,000\hfill \end{array}$

Conclusion

Thus, cash flow statement using direct method has been prepared.