Chapter 11, Problem 7PB

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)		2,616,000
Cash Payments:
Cash paid to supplier (4)	(1,728,000)
Cash paid for income tax (5)	(84,000)
Cash paid for interest (6)	(32,900)
Operating expenses (3)	(612,400)
Total Cash Payments (B)		(2,457,300)
Net cash provided by operating activities $\left(\text{A}-\text{B}\right)$		158,700
Cash flows from investing activities:
Sale of land	62,000
Purchase of Investments	(95,000)
Net cash used for investing activities		(33,000)
Cash used in financing activities:
Issuance of common stock	120,000
Payment of dividends	(60,000)
Net cash provided by financing activities		(60,000)
Net increase (decrease) in cash		65,700
Beginning Cash balance		343,800
Ending Cash balance		409,500
Schedule of non-cash transaction:
Purchase of Equipment by issuing notes payable		$30,000

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	64,000	80,000	(16,000)
Inventory	160,000	145,000	15,000
Prepaid rent	4,600	7,200	(2,600)
Accounts payable	35,000	98,000	(63,000)
Interest payable	5,100	4,000	1,100
Income tax payable	25,000	29,000	(4,000)

Table (2)

(1)

2. Calculate the amount of cash receipt from customer:

$\begin{array}{c}\begin{array}{l}\text{Cash}\text{receipts}\\ \text{from}\text{customers}\end{array}\}=\left(\text{Sales}\text{revenue}+\text{Decrease in accounts receivable (1)}\right)\\ =\$2,600,000+\$16,000\\ =\$2,616,000\end{array}$ (2)

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

$\begin{array}{c}\begin{array}{l}\text{Cash payments for }\\ \text{operating expesnes}\end{array}\}=\text{Operating expense}-\text{Decrease in prepaid expenses (1)}\\ =\$615,000-\$2,600\\ =\$612,400\end{array}$ (3)

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

$\begin{array}{c}\begin{array}{l}\text{Cash payments}\\ \text{ to suppliers}\end{array}\}=\left(\begin{array}{l}\text{Cost of goods sold +}\\ \text{Decrease in} \text{accounts payable + }\\ \text{Increase in inventory}\end{array}\right)\\ =\$1,650,000+\$63,000+\$15,000\\ =\$1,728,000\end{array}$ (4)

5. Calculate the amount income tax expense:

$\begin{array}{c}\begin{array}{l}\text{Cash payments }\\ \text{for income tax}\end{array}\}=\text{Income tax expense + Decrease in income tax payable}\\ =\$80,000+\$4,000\\ =\$84,000\end{array}$ (5)

6. Calculate the amount cash payment for interest expense:

$\begin{array}{c}\begin{array}{l}\text{Cash payments }\\ \text{for interest}\end{array}\}=\text{Interest expense}-\text{Increase in interest payable}\\ =\$34,000-\$1,100\\ =\$32,900\end{array}$ (6)

Conclusion

Therefore, the net increases in cash of Incorporation V for the year ended December 31, 2021 is $65,700.