
Concept explainers
Statement of
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.
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.
Cash Receipts: It encompasses all the cash receipts from sale of goods and on account receivable.
Cash Payments: It encompasses all the cash payments that are made to suppliers of goods and all expenses that are paid.
The below table shows the way of calculation of cash flows from operating activities:
Cash flows from operating activities (Direct method) |
Add: Cash receipts. |
Cash receipt from customer |
Less: Cash payments: |
To supplier |
For operating expenses |
Income tax expenses |
Net cash provided from or used by operating activities |
Table (1)
Cash flows from investing activities: Cash provided by or used in investing activities is a section of statement of cash flows. It includes the purchase or sale of equipment or land, or marketable securities, which is used for business operations.
The below table shows the way of calculation of cash flows from investing activities:
Cash flows from investing activities |
Add: Proceeds from sale of fixed assets |
Sale of marketable securities / investments |
Deduct: Purchase of fixed assets/long-lived assets |
Purchase of marketable securities |
Net cash provided from or used by investing activities |
Table (2)
Cash flows from financing activities: Cash provided by or used in financing activities is a section of statement of cash flows. It includes raising cash from long-term debt or payment of long-term debt, which is used for business operations.
The below table shows the way of calculation of cash flows from financing activities:
Cash flows from financing activities |
Add: Issuance of common stock |
Proceeds from borrowings |
Proceeds from issuance of debt |
Issuance of bonds payable |
Deduct: Payment of dividend |
Repayment of debt |
Interest paid |
Redemption of debt |
Repurchase of stock |
Net cash provided from or used by financing activities |
Table (3)
T-Account: For all the business transactions,
To Prepare: The Statement of cash flow for Company R, using the T-Accounts.

Explanation of Solution
Cash Account: (all amounts are in millions)
Cash Account | ||||||
Date | Details |
Debit ($) | Date | Details |
Credit ($) |
|
December 31, 2016 | Operating activities: | December 31, 2016 | Operating activities: | |||
From customers | 1,954 | To suppliers | 1,523 | |||
For expenses | 456 | |||||
Investing activities: | Investing activities: | |||||
Sale of equipment | 9 | Purchase of equipment | 230 | |||
Financing activities: | Financing activities: | |||||
Issuance of notes | 50 | Payment of dividends | 50 | |||
Issuance of bonds | 160 | |||||
Balance | 86 |
Table (4)
Accounts Receivable Account | ||||||
Date | Details |
Debit ($) | Date | Details |
Credit ($) |
|
December 31, 2015 | Beginning Balance | 132 | December 31, 2016 | Closing Balance | 178 | |
Balance (Increase) | 46 |
Table (5)
Prepaid Insurance:
Prepaid Insurance Account | ||||||
Date | Details |
Debit ($) | Date | Details |
Credit ($) |
|
December 31, 2015 | Beginning balance | 3 | December 31, 2016 | Closing balance | 7 | |
Balance (Increase) | 4 |
Table (6)
Inventory:
Inventory Account | ||||||
Date | Details |
Debit ($) | Date | Details |
Credit ($) |
|
December 31, 2015 | Beginning balance | 175 | December 31, 2016 | 285 | ||
Balance (Increase) | 110 |
Table (7)
Buildings and Equipment:
Buildings and Equipment Account | ||||||
Date | Details |
Debit ($) | Date | Details |
Credit ($) |
|
December 31, 2015 | Beginning balance | 350 | December 31, 2016 | Sold | 180 | |
December 31, 2016 | 50 | December 31, 2016 | Ending balance | 400 | ||
Purchase of equipment | 230 |
Table (8)
Accumulated Depreciation Account | ||||||
Date | Details |
Debit ($) | Date | Details |
Credit ($) |
|
December 31, 2015 | Beginning balance | 240 | December 31, 2016 | Ending balance | 119 | |
December 31, 2016 | Accumulated depreciation | 121 | December 31, 2016 | Balance | 50 | |
Depreciation | 171 |
Table (9)
Accounts Payable:
Accounts Payable Account | ||||||
Date | Details |
Debit ($) | Date | Details |
Credit ($) |
|
December 31, 2016 | Ending balance | 87 | December 31, 2015 | Beginning balance | 100 | |
December 31, 2016 | Balance (Decrease) | 13 | ||||
Table (10)
Accrued Expenses Payable:
Accrued Expenses Payable Account | ||||||
Date | Details |
Debit ($) | Date | Details |
Credit ($) |
|
December 31, 2016 | Ending balance | 6 | December 31, 2015 | Beginning balance | 11 | |
December 31, 2016 | Balance (Decrease) | 5 |
Table (11)
Notes Payable:
Notes Payable Account | ||||||
Date | Details |
Debit ($) | Date | Details |
Credit ($) |
|
December 31, 2015 | Beginning balance | 0 | ||||
December 31, 2016 | Ending balance | 50 | December 31, 2016 | Balance | 50 |
Table (12)
Bonds Payable:
Bonds Payable Account | ||||||
Date | Details |
Debit ($) | Date | Details |
Credit ($) |
|
December 31, 2015 | Beginning balance | 0 | ||||
December 31, 2016 | Ending balance | 160 | Balance | 160 |
Table (13)
Retained Earnings Account | ||||||
Date | Details |
Debit ($) | Date | Details |
Credit ($) |
|
December 31, 2016 | Dividends | 50 | December 31, 2016 | Balance of retained earnings | 53 | |
Balance | 103 |
Table (14)
Prepare T-account for income statement account of R Incorporation for the year ended December 31, 2016:
Sales:
Sales Account | ||||||
Date | Details |
Debit ($) | Date | Details |
Credit ($) |
|
December 31, 2016 | Sales revenue | 2,000 | ||||
Balance | 2,000 |
Table (15)
Cost of Goods Sold:
Cost of Goods Sold Account | ||||||
Date | Details |
Debit ($) | Date | Details |
Credit ($) |
|
December 31, 2016 | Cost of Goods Sold | 1,400 | ||||
Balance | 1,400 |
Table (16)
Depreciation Expense:
Depreciation Expense Account | ||||||
Date | Details |
Debit ($) | Date | Details |
Credit ($) |
|
December 31, 2016 | Depreciation Expense | 50 | ||||
Balance | 50 |
Table (17)
Operating Expense:
Operating Expense Account | ||||||
Date | Details |
Debit ($) | Date | Details |
Credit ($) |
|
December 31, 2016 | Operating Expense | 447 | ||||
Balance | 447 |
Table (18)
Net income (income summary):
Net Income (Income summary)Account | ||||||
Date | Details |
Debit ($) | Date | Details |
Credit ($) |
|
December 31, 2016 | Revenue | 2,000 | December 31, 2016 | Cost of goods sold | 1,400 | |
December 31, 2016 | Balance | 103 | December 31, 2016 | Depreciation expense | 50 | |
December 31, 2016 | Operating expense | 447 |
Table (19)
The statement of cash flow of Company R is as follows.
Company R | ||
Statement of Cash Flows | ||
Amount in Millions | ||
Particulars | Amount ($) | Amount ($) |
Operating activities: | ||
From customers | $1,954 | |
To suppliers of goods | ($1,523) | |
For operating expenses | ($456) | |
Net cash used from operating activities | ($25) | |
Investing activities: | ||
Sale of equipment | ($230) | |
Purchase of equipment | $9 | |
Net cash used from investing activities | ($221) | |
Financing activities: | ||
Issuance of note payable | $50 | |
Issuance of bonds payable | $160 | |
Payment of cash dividends | ($50) | |
Net cash provided by financing activities | $160 | |
Net decrease in cash | ($86) | |
Cash balance, January 1, 2016 | $110 | |
Cash balance, December 31, 2016 | $24 |
Table (20)
Calculate the amount of cash received from customer:
Calculate the amount of cash paid to suppliers of goods:
Calculate the amount of cash paid for operating expenses:
Calculate the amount of proceeds from sale of equipment:
Step 1: Calculate the amount of depreciation:
Step 2: Calculate the amount of proceeds from sale of equipment:
The statement of cash flows of Company R shows opening balance of cash flows in the reporting year 2016 as $110 million and the closing balance of cash as $24 million.
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Chapter 21 Solutions
Intermediate Accounting w/ Annual Report; Connect Access Card
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