Chapter 11, Problem 7PA

To determine

Prepare the cash flow statement of Incorporation V for the year ended December 31, 2021.

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. Operating activities include cash inflows and outflows from business operations. Investing activities includes cash inflows and cash outflows from purchase and sale of land or equipment, or investments. Financing activities includes cash inflows and outflows from issuance of common stock and debt, payment of debt and dividends.

Direct method: Under direct method, cash receipts from customers (cash inflows) and cash payments to suppliers (cash outflows) are reported under the operating activities.

Prepare the cash flow statement of Incorporation V for the year ended December 31, 2021.

Incorporation V
Statement of cash flow- Direct method
For the year ended December 31, 2021
Particulars	Amount ($)	Amount ($)
Cash flows from operating activities:
Cash collection:
Cash collection from customer (2) (A)		3,614,000
Cash Payments:
Cash paid to supplier (4)	(2,426,000)
Cash paid for income tax (5)	(57,000)
Cash paid for interest (6)	(25,000)
Operating expenses (3)	(9,65,200)
Total Cash Payments (B)		(3,473,200)
Net cash provided by operating activities $\left(\text{A}-\text{B}\right)$		140,800
Cash flows from investing activities:
Sale of land	31,000
Purchase of Investments	(115,000)
Net cash used for investing activities		(84,000)
Cash used in financing activities:
Payment of dividends	(30,000)
Net cash provided by financing activities		(30,000)
Net increase (decrease) in cash		26,800
Beginning Cash balance		227,800
Ending Cash balance		254,600
Schedule of non-cash transaction:
Purchase of Equipment by issuing notes payable		$70,000

Table (1)

Working note:

1. Calculate the increase or decreases of current assets and current liabilities:

Schedule in the changes of assets and liabilities
Details	Amount
	2021	2020	Increase/ (decrease)
Accounts receivable	92,000	70,000	22,000
Inventory	1,05,000	1,45,000	(40,000)
Prepaid rent	14,400	7,200	7,200
Accounts payable	75,000	91,000	(16,000)
Interest payable	7,000	12,000	(5,000)
Income tax payable	16,000	15,000	1,000

Table (2)

(1)

2. Calculate the amount of cash receipt from customer:

$\begin{array}{c}\begin{array}{l}\text{Cash}\text{receipts}\\ \text{from}\text{customers}\end{array}\}=\left(\text{Sales}\text{revenue}-\text{Increase in accounts receivable (1)}\right)\\ =\$3,636,000-\$22,000\\ =\$3,614,000\end{array}$ (2)

3. Calculate the amount of cash paid for operating expense:

$\begin{array}{c}\begin{array}{l}\text{Cash payments for }\\ \text{operating expesnes}\end{array}\}=\text{Operating expense}+\text{Increase in prepaid expenses (1)}\\ =\$958,000+\$7,200\\ =\$965,200\end{array}$ (3)

4. Calculate the amount of cash paid to the suppliers:

$\begin{array}{c}\begin{array}{l}\text{Cash payments}\\ \text{ to suppliers}\end{array}\}=\left(\begin{array}{l}\text{Cost of goods sold +}\\ \text{Decrease in} \text{accounts payable (1) }-\\ \text{Decrease in inventory (1)}\end{array}\right)\\ =\left(\$2,450,000+\$16,000\right)-\$40,000\\ =\$2,426,000\end{array}$ (4)

5. Calculate the amount income tax expense:

$\begin{array}{c}\begin{array}{l}\text{Cash payments }\\ \text{for income tax}\end{array}\}=\text{Income tax expense}-\text{Increase in income tax payable (1)}\\ =\$58,000-\$1,000\\ =\$57,000\end{array}$ (5)

6. Calculate the amount cash payment for interest expense:

$\begin{array}{c}\begin{array}{l}\text{Cash payments }\\ \text{for interest}\end{array}\}=\text{Interest expense}+\text{Decrease in interest payable (1)}\\ =\$20,000+\$5,000\\ =\$25,000\end{array}$ (6)

Conclusion

Therefore, the net increase in cash of Incorporation V for the year ended December 31, 2021 is $26,800.