Connect Online Access for Financial Accounting
Connect Online Access for Financial Accounting
18th Edition
ISBN: 9781260706260
Author: Author
Publisher: Mcgraw-hill Higher Education (us)
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Chapter 13, Problem 6AP

a.

To determine

Prepare a statement of cash flows for the current year using the direct method..

a.

Expert Solution
Check Mark

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.

Cash flows from operating activities: Cash flows from operating activity represent the net cash flows from the general operation of the business by comparing the cash receipt and cash payments.

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.

The below table shows the way of calculation of cash flows from operating activities using direct method:

Cash flows from operating activities (Direct method)
 
Add: Cash receipts.
         Cash receipt from customer
 
Less: Cash payments:
To supplier
Interest expense
For operating expenses
Income tax expenses
Net cash provided from or used by operating activities

Table (1)

Cash flows from investing activities: Cash provided by or used in investing activities is a section of statement of cash flows. It includes the purchase or sale of equipment or land, or marketable securities, which is used for business operations.

Cash flows from investing activities
 
Add: Proceeds from sale of fixed assets
         Sale of marketable securities / investments
 
Deduct: Purchase of fixed assets/long-lived assets
              Purchase of marketable securities
Net cash provided from or used by investing activities

Table (2)

Cash flows from financing activities: Cash provided by or used in financing activities is a section of statement of cash flows. It includes raising cash from long-term debt or payment of long-term debt, which is used for business operations.

Cash flows from financing activities
 
Add: Issuance of common stock
          Proceeds from borrowings
          Proceeds from sale of treasury stock
          Proceeds from issuance of debt
 
Deduct: Payment of dividend
              Repayment of debt
              Interest paid
              Redemption of debt
              Purchase of treasury stock
Net cash provided from or used by financing activities

Table (3)

A statement of cash flow for C technologies for the year ended December 31, 2018.

C Technologies
Statement of Cash Flows Direct Method
For the Year Ended December 31, 2018
DetailsAmount ($)Amount ($)
Cash flows from operating activities:  
Cash receipts:  
Cash received from customers3,140,000 
Interest received42,000 
Total cash receipts 3,182,000
Cash payments:  
Cash paid to suppliers and employees(2,680,000) 
Interest paid(38,000) 
Income taxes paid(114,000) 
Total cash payments(2,832,000)
Net cash provided operating activities 350,000
  
Cash flows from investing activities:  
Purchase of marketable securities(60,000) 
Proceeds from sales of marketable securities72,000 
Loans made to borrowers(44,000) 
Collections on loan28,000 
Cash paid to acquire plant(500,000) 
Proceeds from sale of plant assets24,000 
Net cash used for investing activities (480,000)
   
Cash flows from financing activities:  
Proceeds from short-term borrowing82,000 
Payments to settle short-term debt(92,000) 
Proceeds from issuing common stock180,000 
Payment of dividend(120,000) 
Net cash provided by financing activities 50,000
Net increase (decrease) in Cash (80,000)
Cash and cash equivalents, January 1, 2018 244,000
Cash and cash equivalents, December 31, 2018 $164,000

Table (4)

Working notes:

Calculate the amount of cash receipts from customers.

CashreceiptsfromCustomers]=Net sales (+Decrease in Accounts ReceivableORIncrease in Accounts Receivable)= Net sales Increase in Accounts Receivable=$3,200,000$60,000=$3,140,000

Calculate the amount of interest received.

Interest received]={Interest income  (+Decrease in Interest ReceivableORIncrease in Interest  Receivable)}=[(Interest income )+ Decrease in Accounts Receivable]=[$40,000+ $2,000]=$42,000

Calculate the cash paid to supplier and employees.

Step 1: Calculate the amount of cash paid to suppliers of merchandise.

(Cashpaid to suppliersof merchandise)=Cost of Goods Sold (+Decrease in Accounts Payable/Increase in InventoryORIncrease in Accounts Payable /Decrease in Inventory)=(Cost of goods sold + Decrease in accounts payable Decrease in inventory)=$1,620,000+$16,000$60,000=$1,576,000

Step 2: Calculate the amount paid for operating expenses.

(Cashpaid to operating expenses)={Operating expenses Depreciation expenses  (+Decrease in Accrued Operating Expenses Payable/Increase in Short-Term PrepaymentORIncrease inAccrued Operating Expenses PayablePayable /Decrease in Short-Term Prepayment)}=(Operating expenses Depreciation expenses +Decrease in accrued operating expenses payable + Increase in Short-Term Prepayment)=($1,240,000$150,000 +$8,000 + $6,000)=$1,104,000

Step 3: Calculate the amount of cash paid to supplier and employees.

Cash paid to supplier and employees=(Cash paid to suppliers of merchandise+ Cash paid for operating expenses)=$1,575,000+$1,104,000=$2,680,000

Calculate the amount of cash paid for interest expenses.

(Cash paid forinterest expenses)={Interest expense(+Decrease in accrued expenses payableORIncrease in accrued expenses  payable)}=(Interest expense Increase in accrued expenses payable)=($42,000  $4,000)=$38,000

Calculate the amount of cash paid for income tax expenses:

(Cash paid for Income taxes)=Income tax expense(+Decrease in income tax payableORIncrease in income tax payable)=(Income tax expense + Decrease in income tax payable)=($100,000 + $14,000)=$114,000

Calculate the amount of proceeds from sales of marketable securities.

Proceeds from sales ofmarketable securities}= (Cost of the marketable securities sold +Gain reported on sales of marketable securities)=($38,000+$34,000)=$72,000

Calculate the amount of proceeds from sales of plant assets.

Proceeds from sales of plant assets}= (Book value of the plant assets sold Loss reported on sales of plant assets)=($36,000$12,000)=$24,000

Calculate the amount of proceeds from issuing capital stock.

Proceeds from issuing capital stock}= (Amount credited to capital account+Amount credited to additional paid-in capital account)=($20,000+$160,000)=$180,000

b.

To determine

  1. 1. Explain the primary reason why the amount of cash provided by operating activities was substantially greater than the company’s net income.
  2. 2. Explain the primary reason for net decrease in cash over the year, despite the substantial amount of cash provided by operating activities.

b.

Expert Solution
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Explanation of Solution

The primary reason why the amount of cash provided by operating activities substantially more than the company’s net income is because of the depreciation expenses. Under direct method, depreciation expense amount reduces the net income amount and it does not show any effect on cash flows from operating activities.

The primary reason for decrease in cash is investing activities because, C technologies uses their cash in capital expenditure. Hence, investing activities plays a greater role for the net decrease in cash.

c.

To determine

Compute the effect that limiting the growth in receivables to $10,000 would have had on the company’s net increase or decrease in cash (and cash equivalents) for the year.

c.

Expert Solution
Check Mark

Explanation of Solution

Net decrease in cash:

Net decrease in cash ={Net decrease in cash (Increase in accounts receivable Growth in receivable )}={$80,000$50,000($60,000 $10,000 )}=$30,000

Conclusion

Therefore, the net decrease in cash would be $30,000 instead of $80,000.

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Chapter 13 Solutions

Connect Online Access for Financial Accounting

Ch. 13 - 5. In the long run, is it more important for a...Ch. 13 - 6. Of the three types of business activities...Ch. 13 - Prob. 7DQCh. 13 - Prob. 8DQCh. 13 - Prob. 9DQCh. 13 - Prob. 10DQCh. 13 - Prob. 11DQCh. 13 - Prob. 12DQCh. 13 - Prob. 13DQCh. 13 - Prob. 14DQCh. 13 - Prob. 15DQCh. 13 - Prob. 1BECh. 13 - BRIEF EXERCISE 13.2 Cash Flows from Operations...Ch. 13 - BRIEF EXERCISE 13.3 Cash Flows from Operations...Ch. 13 - Prob. 4BECh. 13 - BRIEF EXERCISE 13.5 Cash Flows from Investing Old...Ch. 13 - Prob. 6BECh. 13 - Prob. 7BECh. 13 - BRIEF EXERCISE 13.8 Determining Beginning Cash...Ch. 13 - Prob. 9BECh. 13 - Prob. 10BECh. 13 - EXERCISE 13.1 Using a Statement of Cash...Ch. 13 - EXERCISE 13.2 Using a Statement of Cash Flows Auto...Ch. 13 - EXERCISE 13.3 Computing Cash Flows An analysis of...Ch. 13 - EXERCISE 13.4 Comparing Net Sales and Cash...Ch. 13 - Prob. 5ECh. 13 - EXERCISE 13.6 Reporting Lending Activities and...Ch. 13 - Prob. 7ECh. 13 - Prob. 8ECh. 13 - Prob. 9ECh. 13 - EXERCISE 13.10 Computation of Net Cash Flows from...Ch. 13 - Prob. 11ECh. 13 - EXERCISE 13.12 Classifying Cash Flows Among the...Ch. 13 - EXERCISE 13.13 Cash Flows from Investing...Ch. 13 - Prob. 14ECh. 13 - EXERCISE 13.15 Home Depot, Inc. Using a Statement...Ch. 13 - Prob. 1APCh. 13 - Prob. 2APCh. 13 - Prob. 3APCh. 13 - Prob. 4APCh. 13 - Prob. 5APCh. 13 - Prob. 6APCh. 13 - Prob. 7APCh. 13 - Prob. 8APCh. 13 - Prob. 1BPCh. 13 - PROBLEM 13.2B Reporting Investing Activities An...Ch. 13 - PROBLEM 13.3B Reporting Investing Activities An...Ch. 13 - Prob. 4BPCh. 13 - Prob. 5BPCh. 13 - Prob. 6BPCh. 13 - Prob. 7BPCh. 13 - Prob. 8BPCh. 13 - Prob. 1CTCCh. 13 - Prob. 2CTCCh. 13 - Prob. 3CTCCh. 13 - Prob. 4CTC
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