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EXPANDED STATEMENT OF
Additional information:
1. Store equipment was sold in 20-2 for $35,000. Additional information on the store equipment sold is provided below.
2.
3. The following purchases were made for cash:
4. Declared and paid cash dividends of $60,000.
5. Issued 10,000 shares of $10 par common stock for $142 per share.
6. Acquired additional office equipment by issuing a note payable for $ 16,000.
REQUIRED
Prepare a statement of cash flows explaining the change in cash and cash equivalents for the year ended December 31, 20-2.
SCHEDULE FOR CALCULATION OF CASH GENERATED FROM OPERATING ACTIVITIES Using the information provided in Problem 23-12A for McDowell Company, prepare the following:
1. A schedule for the calculation of cash generated from operating activities for McDowellCompany for the year ended December 31, 20-2.
2. A partial statement of cash flows for McDowell Company reporting cash from operating activities under the direct method for the year ended December 31, 20-2.
1.
Prepare a schedule for the calculation of cash generated from operating activities for M Company for the year ended December 31, 20-2.
Explanation of Solution
Direct method: Under direct method, cash receipts from customers (cash inflows) and cash payments to suppliers (cash outflows) are reported under the operating activities.
Operating activities: Operating activities include cash inflows and outflows from business operations.
Prepare a schedule for the calculation of cash generated from operating activities for M Company for the year ended December 31, 20-2.
Table (1)
2.
Prepare a statement of cash flows for M Company under the direct method for the year ended December 31, 20-2.
Explanation of Solution
Statement of cash flows: This statement 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.
Direct method: Under direct method, cash receipts from customers (cash inflows) and cash payments to suppliers (cash outflows) are reported under the operating activities.
Operating activities: Operating activities include cash inflows and outflows from business operations.
The below table shows the way of calculation of cash flows from operating activities using direct method:
| Cash flows from operating activities (Direct method) |
| Add: Cash receipts. |
| Cash receipt from customer |
| Dividend received |
| Interest received |
| Less: Cash payments: |
| To supplier for acquisition of inventory |
| To employees |
| For interest on loans |
| Income tax expenses and other operating expenses |
| Net cash provided from or used by operating activities |
Table (2)
Cash flows from investing activities: Investing activities refer to the activities carried out by a company for acquisition of long term assets. 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 collection of loan made to borrowers |
| Sale of marketable securities / investments |
| Sale of property, plant and equipment |
| Proceeds from discounting notes receivables |
| Deduct: Purchase of fixed assets/long-lived assets |
| Loan made by the company to others |
| Purchase of marketable securities |
| Net cash provided from or used by investing activities |
Table (3)
Cash flows from financing activities: Financing activities refer to the activities carried out by a company to mobilize funds to carry out the business activities. 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 by signing of a mortgage |
| Proceeds from sale of treasury stock |
| Proceeds from issuance of debt |
| Deduct: Payment of dividend |
| Repayment of debt |
| Interest paid |
| Redemption of debt |
| Purchase of treasury stock |
| Net cash provided from or used by financing activities |
Table (4)
Prepare a statement of cash flows for M Company under the direct method for the year ended December 31, 20-2.
| M Company | ||
| Statement of Cash Flows Direct Method (Partial) | ||
| For the Year Ended December 20-2 | ||
| Details | Amount ($) | Amount ($) |
| Cash flows from operating activities: | ||
| Cash receipts: | ||
| Cash received from customers | 1,905,100 | |
| Interest received | 3,790 | |
| Total cash receipts | 1,908,890 | |
| Cash payments: | ||
| Cash paid for merchandise | (1,170,200) | |
| Cash paid for operating expenses | (446,800) | |
| Cash paid for interest | (1,050) | |
| Cash paid for income taxes | (138,000) | |
| Total cash payments | (1,756,050) | |
| Net cash provided by operating activities | $152,840 | |
| Cash flows from investing activities: | ||
| Sold store equipment | $25,000 | |
| Purchased store equipment | (64,000) | |
| Purchased delivery equipment | (140,000) | |
| Purchased office equipment | (30,000) | |
| Net cash used by investing activities | (209,000) | |
| Cash flows from financing activities: | ||
| Issued common stock | $140,000 | |
| Paid cash dividends | (60,000) | |
| Net cash provided by financing activities | 80,000 | |
| Net increase (decrease) in cash and cash equivalents | $23,840 | |
| Cash and cash equivalents, January 1, 20-2 | 58,325 | |
| Cash and cash equivalents, December 31, 20-2 | $82,165 | |
| Schedule of Noncash Investing and Financing Activities: | ||
| Acquired store equipment by issuing a note payable | $16,000 | |
Table (5)
Working notes:
Prepare the schedule in the changes of current assets and liabilities.
| Schedule in the Change of Assets and Liabilities | ||||
| Details | Amount ($) | Adjustment in Operating Activities | ||
| Accounts | 20-2 | 20-1 | Increase/ (Decrease) | |
| Accounts receivable | 310,700 | 325,800 | (15,100) | Add |
| Merchandised inventory | 685,400 | 540,200 | 145,200 | Less |
| Accounts payable | 110,000 | 195,000 | (85,000) | Less |
| Income tax payable | 20,000 | 25,000 | (5,000) | Less |
| Supplies and prepayments | 27,000 | 39,000 | (12,000) | Add |
| Accrued and withheld payroll taxes | 16,400 | 14,900 | 1,500 | Add |
| Accrued interest receivable | 720 | 610 | 110 | Less |
| Accrued interest payable | 875 | 1,035 | (160) | Less |
Table (4)
Calculate the amount of cash received from customers.
(Cash receipts from customers)=[Net sales (+Decrease in accounts receivable OR − Increase in accounts receivable)]=(Net sales + Decrease in accounts receivable)=($1,890,000+$15,100)=$1,905,100
Calculate the amount of cash received for interest.
Cash received for interest}=[Interst revenue (+Decrease in accrued interest receivable OR − Increase in accrued interest receivable)]=(Interst revenue −Increase in accrued interest receivable)=($3,900−110)=$3,790
Calculate the amount of cash paid for merchandise in 20-2.
Cash paid for merchandise}=Cost of Goods Sold (+ Decrease in Accounts Payable/ Increase in Inventory OR − Increase in Accounts Payable / Decrease in Inventory)=(Cost of goods sold + Decrease in accounts payable +Increase in inventory)=$940,000+$85,000+$145,200=$1,170,200
Compute the amount of cash received from customers in 20-2.
Cash paid for operating expenses}=[Operating expenses other than depreciation (+Decrease in accrued expense payable+Increase in supplies and prepayments OR − Increase in accrued expense tax payable−Decrease in supplies and prepayments)]=(Operating expenses −Depreciation expense − Increase in accrued and withheld payroll taxes−Decrease in supplies and prepayments)=($572,300−$112,000 − $1,500 −$12,000)=$446,800
Compute the amount of cash paid for interest in 20-2.
(Cash paid for interest expenses)=Interest expenses(+Decrease in accrued liabilities OR−Increase in accrued liabilities)=(Interest expenses +Decrease in accrued interest payable)=$890+$160=$1,050
Compute the amount of cash paid for income taxes in 20-2.
(Cash paid for income taxes)=Income tax expense(+Decrease in income taxes payable OR−Increase in income taxes payable)=(Income tax expense +Decrease in interest payable)=$133,000+$5,000=$138,000
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Chapter 23A Solutions
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