Chapter 16, Problem 5APSA

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 5APSA

Solution:

The cash flow from statement using direct method −

FORTEN COMPANY
Statement of cash flows
FOR THE year ended December 31, 2015
Particulars	Amount ($)	Amount ($)
Cash flows from operating activities
Receipts:
Cash receipts from customers		567,315
Payments:
Cash paid for merchandise	370,390
Cash paid for other expenses	131,775
Cash paid for income taxes	24,250
Total cash payments		(526,415)
Net cash provided by operating activities		40,900
Cash flows from investing activities
Cash received from sale of equipment	11,625
Cash paid for equipment	(30,000)
Net cash used in investing activities		(18,375)
Cash flows from financing activities
Cash borrowed on short-term note	4,000
Cash paid for long-term note	(50,125)
Cash received from issuing stock	50,000
Cash paid for dividends	(50,100)
Net cash used in financing activities		(46,225)
Net decrease in cash		(23,700)
Beginning cash balance		73,500
Ending cash balance		49,800

Explanation of Solution

1.   Cash flow from operating activities-

First, the receipts are calculated.
Cash receipts from customers
Given,

• Sales for the year = $ 582,500
• Accounts receivables for 2014 = $ 50,625
• Accounts receivables for 2015 = $ 65,810

  $\begin{array}{l}Cashreceivedfromcustomers=\left(\begin{array}{l}Accountsreceivablesfor2014\\ +Salesfortheyear\end{array}\right)-Accountsreceivablesfor2015\hfill \\ Cashreceivedfromcustomers=\left(\$50,625+\$582,500\right)-\$65,810\hfill \\ Cashreceivedfromcustomers=\$567,315\hfill \end{array}$

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 = $285,000
• Accounts payables for 2014 = $114,675
• Accounts payables for 2015 = $53,141
• Inventory for 2014 = $251,800
• Inventory for 2015 = $275,656

  $\begin{array}{l}\begin{array}{l}Cashpaidformerchandise=Costofgoodssold+Increaseininventory+Decreaseinpayables\hfill \\ Cashpaidformerchandise=\$285,000+\left(\$275,656-\$251,800\right)+\left(\$114,675-\$53,141\right)\hfill \\ Cashpaidformerchandise=\$285,000+\$23,856+\$61,534\hfill \end{array}\\ Cashpaidformerchandise=\$370,390\end{array}$

- Cash paid for other expenses
Given,

• Other expenses = $132,400
• Prepaid expenses for 2014 = $1,875
• Prepaid expenses for 2015 = $1,250

  $\begin{array}{l}\begin{array}{l}Cashpaidforotherexpenses=OtherExpenses–Decreaseinprepaidexpenses\hfill \\ Cashpaidforotherexpenses=\$132,400–\left(\$1,875-\$1,250\right)\hfill \\ Cashpaidforotherexpenses=\$132,400–\$625\hfill \end{array}\\ Cashpaidforotherexpenses=\$131,775\end{array}$

• Cash paid for income taxes
  
Given, Income tax = $24,250
Now, the total cash payments will be calculated as under −

  $\begin{array}{l}Totalpayments=Cashpaidformerchandise+Cashpaidforotherexpenses+Cashpaidforincometaxes\hfill \\ Totalpayments=\$370,390+\$131,775+24,250\hfill \\ Totalpayments=\$526,415\hfill \end{array}$

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

  $\begin{array}{l}\begin{array}{l}Cashflowfromoperatingactivities=Totalreceipts–Totalpayments\hfill \\ Cashflowfromoperatingactivities=\$567,315-\$526,415\hfill \end{array}\\ Cashflowfromoperatingactivities=\$40,900\end{array}$

The cash flow from operating activities = $40,900.

Cash flow from investing activities-

Given,

• Cash received from sale of equipment = $11,625
• Cash paid for equipment = $30,000
Now, cash used in investing activities will be calculated as −

  $\begin{array}{l}Cashusedininvestingactivities=Cashreceivedfromsaleofequipment-Cashpaidforequipment\hfill \\ Cashusedininvestingactivities=\$11,625-\$30,000\hfill \\ Cashusedininvestingactivities=\left(\$18,375\right)\hfill \end{array}$

The cash used in investing activities = ($18,375).
Cash flow from financing activities- Given,

• Cash borrowed on short-term note = $4,000
• Cash paid for long-term note = $50,125
• Cash paid for dividends= $50,100

Cash received from issuing stock is calculated as under-

  $\begin{array}{l}Cashreceivedfromissuingstock=No.ofshares\times Pricepershare\hfill \\ Cashreceivedfromissuingstock=2,500shares\times \$20\hfill \\ Cashreceivedfromissuingstock=\$50,000\hfill \end{array}$

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

  $\begin{array}{l}\begin{array}{l}\begin{array}{l}Cashusedinfinancingactivities=Cashborrowedonshort-termnote+Cashreceivedfromissuingstock\\ -Cashpaidforlong-termnote-Cashpaidfordividends\end{array}\hfill \\ Cashusedinfinancingactivities=\$4,000+\$50,000-\$501,25-\$50,100\hfill \end{array}\\ Cashusedinfinancingactivities=\left(\$46,225\right)\end{array}$

The cash used in financing activities = ($46,225).
Now, we need to calculate net increase/ (decrease in cash)-

  $\begin{array}{l}\begin{array}{l}Netdecreaseincash=Cashflowsfromoperatingactivities-Cashusedininvestingactivities\\ -Cashusedinfinancingactivities\end{array}\hfill \\ Netdecreaseincash=\$40,900-\$18,375-\$46,225\hfill \\ Netdecreaseincash=\$23,700\hfill \end{array}$

Last step is to calculate Ending cash balance-
Given,

• Cash balance for 2014=$73,500

  $\begin{array}{l}Endingcashbalance=Netdecreaseincash+Cashbalancefor2014\hfill \\ Endingcashbalance=\left(\$23,700\right)+\$73,500\hfill \\ Endingcashbalance=\$49,800\hfill \end{array}$

Conclusion

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