Chapter 16, Problem 27QS

To determine

Prepare the operating activities section of Incorporation C’s statement of cash flows using direct method.

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.

Direct method: Under direct method, cash receipts from customers (cash inflows) and cash payments to suppliers (cash outflows) are reported under the operating activities.

Operating activities: Operating activities include cash inflows and outflows from business operations.

Prepare the operating activities section of Incorporation C’s statement of cash flows using direct method:

C Incorporation
Statement of Cash Flows- Direct Method (Partial)
For the year ended December 31, 2019
Details	Amount ($)	Amount ($)
Cash flows from operating activities:
Cash receipt from customer (1)		498,000
Less: Cash payments:
Payment for inventory (2)	310,000
Payment for other expenses (3)	86,300
Payment for taxes(4)	18,500	414,800
Net cash provided by operating activities		83,200

Table (1)

Working notes:

Calculate the amount of change in accounts receivable:

$\begin{array}{c}\text{Change in accounts receivable}=\left(\begin{array}{l}\text{Accounts receivable in 2019}-\\ \text{Accounts receivable in 2018}\end{array}\right)\\ =\$41,000-\$51,000\\ =\$10,000\left(\text{Decrease}\right)\end{array}$

Calculate the amount of cash received from sales to customers for year 2019:

$\begin{array}{c}\begin{array}{l}\text{Cash}\text{receipts}\text{from}\\ \text{Customers}\end{array}]=\text{Sales}\text{revenue}+\text{Decrease in accounts receivable}\\ =\$488,000+\$10,000\\ =\$498,000\end{array}$ (1)

Calculate the cash paid for acquiring inventory during 2019.

$\begin{array}{c}\text{Cash paid for inventory}=\text{ Cost of goods sold}-\left(\begin{array}{l}\text{Decrease in }\\ \text{inventory}\end{array}\right)+\left(\begin{array}{l}\text{Decrease in }\\ \text{accounts payable}\end{array}\right)\\ =\$314,000-\$10,000+\$6,000\\ =\$310,000\end{array}$

Hence, the cash paid for acquiring inventory during the year by Incorporation C is $310,000.

Note: Refer Table (2) for changes in inventory and accounts payable.

Calculate the changes in accounts payable and inventory.

Changes in accounts payable and inventory
Particulars	Amount
	Current year  (December 31, 2019) (1)	Previous year (December 31, 2018) (2)	Increase/(Decrease) $(1)-(2)$
Inventory	$85,800	$95,800	($10,000)
Accounts payable	$15,000	$21,000	($6,000)

Table (2)

…… (2)

Determine the cash paid for other expenses during 2019.

$\begin{array}{c}\text{Cash paid for other expense}=\left[\begin{array}{l}\text{Other Operating expenses}+\left(\begin{array}{l}\text{Increase in }\\ \text{prepaid expense}\end{array}\right)-\\ \left(\begin{array}{l}\text{Increase in }\\ \text{wages payable}\end{array}\right)\end{array}\right]\\ =\$89,100+\$1,200-\$4,000\\ =\$86,300\end{array}$

Hence, the cash paid for other expenses during the year by Incorporation C is $86,300.

Note: Refer Table (3) for changes in wages payable and prepaid expense.

Working Note:

Determine the changes in accounts payable and inventory.

Schedule in the changes of assets and liabilities
Particulars	Amount ($)
	Current year (December 31, 2019) (1)	Previous year (December 31, 2018) (2)	Increase/ (Decrease) $(1)-(2)$
Wages payable	$9,000	$5,000	$4,000
Prepaid expense	$5,400	$4,200	$1,200

Table (3)

…… (3)

Calculate the amount of cash paid for income taxes:

Calculate the amount of change in income taxes:

$\begin{array}{c}\text{Change in income taxes}=\left(\begin{array}{l}\text{Income tax payable in 2019}\\ -\text{Income tax payable in 2018}\end{array}\right)\\ =\text{\$1,400}-\$2,600\\ =\$1,200\left(\text{Decrease}\right)\end{array}$

Calculate the amount of cash paid for income taxes.

$\begin{array}{c}\begin{array}{l}\text{Cash paid for}\\ \text{income taxes}\end{array}]=\left(\begin{array}{l}\text{Income tax expense }\\ \text{+Decrease in income tax payable}\end{array}\right)\\ =\$17,300+\$1,200\\ =\$18,500\end{array}$

Conclusion

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