Financial Accounting, 8th Edition
Financial Accounting, 8th Edition
8th Edition
ISBN: 9780078025556
Author: Robert Libby, Patricia Libby, Daniel Short
Publisher: McGraw-Hill Education
Question
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Chapter 12, Problem 4P

1.

To determine

Prepare the operating activities section of the statement of cash flows using the direct method.

1.

Expert Solution
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Explanation of Solution

Statement of cash flows:

Statement of cash flow is a financial statement that shows the cash and cash equivalents of a company for a particular period of time. It shows the net changes in cash, by reporting the sources and uses of cash as a result of operating, investing, and financing activities of a company.

Direct method-Cash flow statement:

In this method, the information from the operation segment of the company is used for the preparation of cash flow statement instead of using accrual accounting values

Prepare the statement of cash flows of Company O for the year ended December 31, using direct method.

Company O
Statement of Cash Flows (direct Method)
For the year ended
ParticularsAmount ($)Amount ($)
Cash flows from operating activities:
  Add: Cash receipts from customers (1)22,780
  Less: Cash  Payments to suppliers (2)(10,512)
  Less: Cash Payments for salaries (3)(4,055)
  Less: Cash payments for rent (4)(3,205)
  Less: Cash payments for insurance (5)(1,113)
  Less: Cash payments for utilities(850)
  Less: Cash payments for bond interest(450)
   Net cash flows from operating activities$2,595

Table (1)

Working Note:

Calculate the cash collection from customers.

Cashcollectionfromcustomers=Sales+Decrease inaccountsreceivable=$22,600+$180=$22,780 (1)

Calculate payments made to suppliers:

Paymenttosuppliers=[Costofgoodssold+Increaseinmerchandiseinventory(Increase inAccountspayable)]=$10,500+$85$73=$10,512 (2)

Calculate payments for salaries:

Paymentsforsalaries=Salaries expenseIncreaseinsalariespayable= $4,070$15=$4,055 (3)

Calculate payment for rent:

Paymentsforrent=[Rentexpense+Decreaseinrentpayable(Decreaseinprepaidrent)]=$3,200 +$6$1=$3,205 (4)

Calculate payments for insurance:

Paymentsforinsurance= Insuranceexpense+Increaseinprepaidexpense=$1,100+$13=$1,113 (5)

Calculate payments for utilities:

2.

To determine

Prepare the operating activities section of the statement of cash flows using the indirect method.

2.

Expert Solution
Check Mark

Explanation of Solution


Statement of cash flows:

Statement of cash flow is a financial statement that shows the cash and cash equivalents of a company for a particular period of time. It shows the net changes in cash, by reporting the sources and uses of cash as a result of operating, investing, and financing activities of a company.

Indirect method-Cash flow statement:

Under this method, the following amounts are to be adjusted from the Net Income to calculate the net cash provided from operating activities.

Prepare the statement of cash flows of Company O for the year ended December 31, using indirect method.

Company O
Statement of Cash Flows (Indirect method)
For the year ended
ParticularsAmount ($)Amount ($)
Cash flows from operating activities:  
 Net loss  (220)
Adjustments to reconcile net loss to net cash
provided by operating activities:
 Add: Depreciation expense 2,000
  Add: Loss on sale of investments 650
 Add:  Decrease in accounts receivable 180
  Less: Increase in merchandise inventory (85)
  Add: Increase in accounts payable 73 
  Add: Increase in salaries payable 15
  Less: Decrease in rent payable (6)
  Less: Decrease in prepaid rent (1) 
  Less: Increase in prepaid insurance (13)
Total adjustments  2,815
 Net cash provided by operating activities2,595

Table (2)

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Chapter 12 Solutions

Financial Accounting, 8th Edition

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