Chapter 12, Problem 2PSB

To determine

Cash Flow Statement:

Cash flow statement is that statement in which, transaction related to cash are recorded. It is mandatory report and included in the financial statement of the company. It is divided into three parts operating activities, investing activity, and financial activity

Operating Activity:

Operating activity is the first part of the cash flow statement. The main focuses of the operating activity on the cash inflow and outflow from the selling goods, providing services and manufacturing. Long term capital and investing cost are not included in the operating activity.

Financing Activity:

Financing activity is the part of the cash flow statement. Financing activity involves the long term liability, borrowing and stockholder’s equity. All the changes in the long term liability, equity and borrowings reported in the financial statement.

Investing Activity:

Investing activity is the third part of the cash flow statement which gives the information related to the acquisition and disposal of the long term assets of the company such as land and building, investment and plant.

To prepare: Cash flow from operating activities by direct method,

Explanation of Solution

Cash flow from operating activities	Amount($)
Cash receipts form customer	155,400
Cash paid for rent	(4,900)
Cash paid for salaries	(19,700)
Cash paid for insurance	(2,560)
Cash paid for interest	(2,400)
Cash paid for utilities	(1,800)
Cash paid for inventory	(72,080)
Net cash flow from operating activities	51,960

     Table (1)

Working notes:

Given,

Sales revenue is $156,000.

Account receivable for the year 2016 is $3,000.

Account receivable for the year 2017 is $3,600.

Computation of cash received from customer,

  $\begin{array}{c}\text{Cash}\text{receipt}\text{from}\text{customer}s=\left(\begin{array}{l}\text{Sales}\text{revenue}+\text{Account}\text{receivable}2016\\ -\text{Account}\text{recevable}2017\end{array}\right)\\ =\$156,000+\$3,000-\$3,600\\ =\$155,400\end{array}$

Cash receipt from customers is $155,400.

Given,

Rent expense is $5,000.

Prepaid rent for the year 2017 is $100.

Prepaid rent for the year 2016 is $200.

Computation of the cash paid for rent,

  $\begin{array}{c}\text{Cash}\text{paid}\text{for}\text{rent}=\text{Rent}\text{expense}+\text{Prepaid}\text{rent}2017-\text{Prepaid}\text{rent}2016\\ =\$5,000+\$100-\$200\\ =\$4,900\end{array}$

Cash paid for rent is $4,900.

Given,

Salaries expense is $20,000.

Salaries payable for the year 2016 is $600.

Salaries payable for the year 2017 is $900.

Computation of the salaries payable,

  $\begin{array}{c}\text{Cash}\text{paid}\text{for}\text{salaries}=\left(\begin{array}{l}\text{Salaries}\text{expense}+\text{Salaries}\text{payable}2016\\ -\text{Salaries}\text{payable}2017\end{array}\right)\\ =\$20,000+\$600-\$900\\ =\$19,700\end{array}$

Cash paid for the salaries is $19,700.

Given,

Insurance expense is $2,600.

Prepaid insurance for the year 2017 is $140.

Prepaid insurance for the year 2016 is $180.

Computation of cash paid for insurance,

  $\begin{array}{c}\text{Cash}\text{paid}\text{for}\text{insurance}=\left(\begin{array}{l}\text{Insurance}\text{expense}+\text{Prepaid}\text{insurance}2017\\ -\text{Prepaid}\text{insurance}2016\end{array}\right)\\ =\$2,600+\$140-\$180\\ =\$2,560\end{array}$

Cash paid for insurance is $2,560.

Given,

Utilities expense is $2,000.

Utilities payable for the year 2016 is $0.

Utilities payable for the year 2017 is $200.

Computation of cash paid for utilities,

  $\begin{array}{c}\text{Cash}\text{paid}\text{for}\text{utilities}=\left(\begin{array}{l}\text{Utilities}\text{expense}+\text{Utilities}\text{payable}2016\\ -\text{Utilities}\text{payable}2017\end{array}\right)\\ =\$2,000+\$0-\$200\\ =\$1,800\end{array}$

Cash paid for utilities is $1,800.

Given,

Cost of goods sold is $72,000.

Opening inventory is $ 980.

Closing inventory is $ 860.

Account payable for the year 2016 is $2,600.

Account receivable for the year is $2,400.

Computation of cash paid to acquire inventory,

  $\begin{array}{c}\text{Cash}\text{paid}\text{to}\text{acquire}\text{inventory}=\left[\begin{array}{c}\text{Cost}\text{of}\text{goods}\text{sold}\\ +\left(\text{Closing}\text{inventory}-\text{Openinge}\text{inventory}\right)\\ +\left(\text{Account}\text{payable}2016-\text{Account}\text{payable}2017\right)\end{array}\right]\\ =\$72,000+\left(\$860-\$980\right)+\left(\$2,600-\$2,400\right)\\ =\$72,080\end{array}$

Cash paid to acquire inventory is $72,080.