1.
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)
To Prepare: The statement of cash flows from operating activities using direct method for P Company for the year ended December 31, 2016.
2
Statement of cash flows: It is one of the financial statement that shows the cash and cash equivalents of a company for a particular period. It determines the net changes in cash through reporting the sources and uses of cash due to the operating, investing, and financing activities of a company.
Indirect method: Under this method, the following amounts are to be adjusted from the Net Income to calculate the net cash provided from operating activities.
Cash flows from operating activities: These are the cash produced by the normal business operations.
The below table shows the way of calculation of cash flows from operating activities:
| Cash flows from operating activities (Indirect method) |
| Add: Decrease in current assets |
| Increase in current liability |
| |
| Loss on sale of plant assets |
| Deduct: Increase in current assets |
| Decrease in current liabilities |
| Gain on sale of plant assets |
| Net cash provided from or used by operating activities |
Table (4)
To Prepare: The statement of cash flows from operating activities using indirect method for P Company for the year ended December 31, 2016.
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Chapter 21 Solutions
INTERMEDIATE ACCOUNTING
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