Financial Accounting Fundamentals
Financial Accounting Fundamentals
6th Edition
ISBN: 9781259726910
Author: John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher: McGraw-Hill Education
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Chapter 12, Problem 16QS
To determine

Prepare the cash provided or used from operating activities using direct method.

Expert Solution & Answer
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Explanation of Solution

Statement of cash flows: Statement of cash flows 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: 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.

C Incorporation
Statement of Cash Flows- Direct Method (Partial)
For the year ended December 31, 2017
DetailsAmount ($)Amount ($)
Cash flows from operating activities:  
Cash receipt from customer 498,000
Less: Cash payments:  
Payment for inventory310,000 
Payment for other expenses86,300 
Payment for taxes18,500414,800
Net cash provided by operating activities $83,200

Table (1)

Working notes:

The amount of cash receipts from customers.

Step 1: Calculate the change in accounts receivable:

Change in accounts receivable=(Ending balanceBeginning balance)=$41,000$51,000=$10,000(Decrease)

Step 2: The Calculate the amount of cash receipts from customers.

CashreceiptsfromCustomers]=Salesrevenue (+Decrease in Accounts ReceivableORIncrease in Accounts Receivable)= Sales Revenue + Decrease in Accounts Receivable=$488,000+$10,000=$498,000

Determine the cash paid for other expenses during 2017.

Step 1: Calculate the change in wages payable and prepaid expenses:

Schedule in the changes of assets and liabilities
ParticularsAmount

Current year

 (December 31, 2017)

(1)

Previous year

(December 31, 2016)

(2)

Increase/
(Decrease)

(1)(2)

Wages payable$9,000$5,000$4,000
Prepaid expense$5,400$4,200$1,200

Table (2)

Step 2: The Calculate the amount of cash paid for other expenses

Cash paid for other expense= [Other Operating expenses+(Increase in prepaid expense)(Increase in wages payable)]=[$89,100+$1,200$4,000]=$86,300

Calculate the amount of cash paid for income taxes:

Step 1: Calculate the change in income taxes:

Change in income taxes=(Ending balanceBeginning balance)=$1,400$2,600=$1,200(Decrease)

Step 2: The Calculate the amount of cash paid for income taxes.

Cash paid forIncome taxes]={Income tax expense(+Decrease in income taxpayable/Decrease deferred tax liabilityORIncrease in income tax payable/Increase in deferred tax liability)}=(Income tax expense +Decrease in income tax payable)=$17,300+$1,200=$18,500

Conclusion

Hence, the cash provided or used from operating activities using direct method is $83,200.

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Chapter 12 Solutions

Financial Accounting Fundamentals

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