Loose Leaf for Fundamental Accounting Principles
Loose Leaf for Fundamental Accounting Principles
23rd Edition
ISBN: 9781259687709
Author: John J Wild, Ken Shaw Accounting Professor, Barbara Chiappetta Fundamental Accounting Principles
Publisher: McGraw-Hill Education
Question
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Chapter 16, Problem 3GLP
To determine

Introduction: Cash Flow Statement is an important part of the Financial Statements of an enterprise. It shows the inflow and outflow of Cash during a particular period. It is an analytical tool to check the short term ability of a company to pay its coming liabilities. It comprises of three activities called Operating Activities, Investing Activities and Financing Activities.

Operating activity is the most important section of the Statement of Cash Flows. It depicts the Cash Inflows and Outflows with respect to the day-to-day operations of the enterprise. Here, Cash Inflows are cash receipts from customers for sale of merchandise inventory or services and Cash Outflows are payments for purchase of merchandise inventory or operating expenses. As per IFRS, Interest & Dividend incomes, Interest & Dividend payments can also be included in operating activities.

Operating Activities can be reported using any of the following methods:

1. Indirect Method: It starts from Net Income and adjusts it to arrive at net cash provided by operating activities.

2. Direct Method: It shows directly the cash receipts and payments from operations of the business. Some T-accounts are prepared in this method to arrive at the cash flows.

Investing Activity shows the inflow and outflow of Cash due to sale or purchase of Assets and/or Investments. Example: Purchase of Fixed Asset, Sale of Investments.

Financing Activity shows flow of Cash from Issuance or buy-back of Shares, redemption of debentures etc.

To State:

1. Summary Journal Entries reflecting changes in Trial Balances.

2. Statement of Cash Flows (Direct Method).

3. Reconciliation to the Indirect Method for Net Cash provided by Operating Activities.

Expert Solution & Answer
Check Mark

Answer to Problem 3GLP

Solution:

1. The Summary Journal Entries in the books of Golden Corporation are as follows:

    $ $
S. No. Particulars Debit Credit
1 Cash 1,780,000  
  Customers   1,780,000
       
2 Suppliers 1,145,000  
  Cash   1,145,000
       
3 Other Expenses 494,000  
  Cash   494,000
       
4 Income Tax Expense 19,000  
  Cash   19,000
       
5 Equipment 36,000  
  Cash   36,000
       
6 Cash 60,000  
  Common Stock   60,000
       
7 Dividend 89,000  
  Cash   89,000

2. Cash Flow Statement of Golden Corporation for the year ending December 31, 2017 using Direct Method is as follows:

Golden Corporation
Statement of Cash Flows
For the year ended December 31,2017
Cash Flows from Operating Activities: $ $
Receipts:    
Collections from Customers   1780000
     
Payments:    
Payment to Suppliers -1145000  
Payment towards Other Expenses -494000  
Payment towards Income Tax Expense -19000 -1658000
     
Net Cash provided by Operating Activities   122,000
     
Cash Flow from Investing Activities    
Cash payment for Acquisition of Equipment -36,000 -36,000
Net Cash used for Investing Activities (B)   -36,000
     
Cash Flow from Financing Activities    
Cash receipts from Issuance of Common Stock 60,000  
Cash payment of Dividend -89,000 -29,000
Net Cash used for Financing Activities ( C)   -29,000
     
Net Increase in Cash & Cash Equivalents (A+B+C)   57,000
Cash & Cash Equivalents at the Beginning of the year   1,07,000
Cash & Cash Equivalents at the End of the year   1,64,000

3. Reconciliation of Cash Flow from Operating Activities of Golden Corporation for the year ended on December 31, 2017 using Indirect Method is as follows:

Golden Corporation
Statement of Cash Flows
For the year ended December 31,2017
Cash Flows from Operating Activities: $ $
Net Income   1,36,000
Adjustments:    
Depreciation Expense 54,000  
Increase in Accounts Receivable -12,000  
Increase in Inventory -75,000  
Increase in Accounts Payable 16,000  
Increase in Income Taxes Payable 3,000 -14,000
Net Cash provided by Operating Activities (A)   1,22,000
     

Explanation of Solution

Explanation: The above mentioned solution is explained below:

( Direct Method )

1. Collections from Customers = Opening Accounts Receivable + Sales - Closing Accounts Receivable

= $71,000 + $1,792,000 - $83,000

=$1,780,000

2. Payment to Suppliers = Closing Inventory + Cost of Goods Sold - Opening Inventory + Opening Accounts Payable - Closing Accounts Payable

=$601,000 + $1,086,000 - $526,000 + $71,000 - $87,000

=$1,145,000

3. Payment towards Other Expenses = Other Expenses for the year

=$494,000

* All the Other expenses are paid in cash and hence, these are not outstanding.

4. Payment towards Income Tax Expense = Opening balance of Income Tax Payable + Income Tax Expense for the year - Closing Balance of Income Tax Payable

=$25,000 + $22,000 - $28,000

=$19,000

5. The above adjustments are made to arrive at Net Cash provided / used by Operating Activities.

6. Cash paid for Acquisition of Equipment is an Outflow from Investing Activities.

7. Cash receipts from Issuance of Common Stock are Cash Inflows from Financing Activities.

8. Cash Payment of Dividend are Cash Outflows from Financing Activities.

( Indirect Method )

1. Depreciation Expense is a non-cash expense. Hence, it has been added to Net Income to arrive at cash flows from operating activities.

2. In Indirect method, we take into account the Changes in Working Capital. Increase in Current Assets & Decrease in Current Liabilities is deducted from the Net Income. It signifies that there is outflow of cash by increasing assets like inventory and/or by paying liabilities like accounts payable. Whereas, Decrease in Current Assets & Increase in Current Liabilities is added in the Net Income. It signifies that there is inflow of cash by decreasing assets like debtors and/or by increasing the amount of dues.

3.These adjustments are made to arrive at Net Cash provided/used by Operating Activities.

Conclusion

Conclusion: Hence, we can conclude that Net Cash provided by Operating Activities ( $164,000 ) computed using direct method is reconciled with the indirect method.

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Chapter 16 Solutions

Loose Leaf for Fundamental Accounting Principles

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