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FUND.ACCT.PRIN -ONLINE ONLY >I<
22nd Edition
ISBN: 9780077632878
Author: Wild
Publisher: MCG
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Chapter 16, Problem 5APSA
To determine

Concept Introduction:

Cash flow statement:

Cash flow statement is one of the financial statements which shows the cash flows of the company during a given period of time.
When cash receipts and cash payments are used for calculating cash flow from operating activities, this method is termed as direct method.

To prepare:

Cash flow statement using direct method

Expert Solution & Answer
Check Mark

Answer to Problem 5APSA

Solution:

The cash flow from statement using direct method −

    FORTEN COMPANY
    Statement of cash flows
    FOR THE year ended December 31, 2015
     
     
     
    ParticularsAmount ($)Amount ($)
    Cash flows from operating activities 
     
    Receipts:

    Cash receipts from customers

    567,315 
    Payments:

    Cash paid for merchandise
    370,390
     
    Cash paid for other expenses
    131,775
     
    Cash paid for income taxes
    24,250
     
    Total cash payments(526,415)
    Net cash provided by operating activities 40,900
     
     
     
    Cash flows from investing activities 
     
    Cash received from sale of equipment
    11,625
     
    Cash paid for equipment
    (30,000)
     
    Net cash used in investing activities (18,375)
     
     
     
    Cash flows from financing activities 
     
    Cash borrowed on short-term note
    4,000
     
    Cash paid for long-term note
    (50,125)
     
    Cash received from issuing stock
    50,000
     
    Cash paid for dividends
    (50,100)
     
    Net cash used in financing activities (46,225)
     
     
     
    Net decrease in cash (23,700)
    Beginning cash balance
     
    73,500
    Ending cash balance 49,800

Explanation of Solution

    1.   Cash flow from operating activities-
First, the receipts are calculated.
Cash receipts from customers
Given,
  • Sales for the year = $ 582,500
  • Accounts receivables for 2014 = $ 50,625
  • Accounts receivables for 2015 = $ 65,810

  Cash received from customers =( Accounts receivables for 2014  + Sales for the year )Accounts receivables for2015Cash received from customers =( $ 50,625 + $ 582,500)$65,810Cash received from customers = $567,315

Next, cash payments for the year will be calculated.
There are three cash payments during the year related to operating activities-

  1. Cash paid for merchandise
  2. Cash paid for other expenses
  3. Cash paid for income taxes
These payments will be calculated as under-
Cash paid for merchandise
Given,
  • Cost of goods sold = $285,000
  • Accounts payables for 2014 = $114,675
  • Accounts payables for 2015 = $53,141
  • Inventory for 2014 = $251,800
  • Inventory for 2015 = $275,656

   Cash paid for merchandise=Cost of goods sold+Increase in inventory+Decrease in payables Cash paid for merchandise=$285,000+( $275,656$251,800 )+( $114,675$53,141 ) Cash paid for merchandise=$285,000+$23,856+$61,534Cash paid for merchandise=$370,390

- Cash paid for other expenses
Given,

  • Other expenses = $132,400
  • Prepaid expenses for 2014 = $1,875
  • Prepaid expenses for 2015 = $1,250

   Cash paid for other expenses=Other Expenses  Decrease in prepaid expenses Cash paid for other expenses=$132,400  ( $1,875$1,250 ) Cash paid for other expenses=$132,400  $625Cash paid for other expenses=$131,775

  • Cash paid for income taxes
  • Given, Income tax = $24,250
    Now, the total cash payments will be calculated as under −

      Total payments=Cash paid for merchandise+ Cash paid for other expenses+ Cash paid for income taxesTotal payments=$370,390+$131,775+24,250Total payments=$526,415

Now, cash flow from operating activities will be calculated as −

   Cash flow from operating activities = Total receipts  Total payments Cash flow from operating activities = $ 567,315  $526,415Cash flow from operating activities = $ 40,900

The cash flow from operating activities = $40,900.

  • Cash flow from investing activities-
  • Given,
    • Cash received from sale of equipment = $11,625
    • Cash paid for equipment = $30,000
    • Now, cash used in investing activities will be calculated as −

        Cash used in investing activities =Cash received from sale of equipment Cash paid for equipmentCash used in investing activities =$11,625$30,000Cash used in investing activities =( $18,375)

    The cash used in investing activities = ($18,375).
    Cash flow from financing activities- Given,

    • Cash borrowed on short-term note = $4,000
    • Cash paid for long-term note = $50,125
    • Cash paid for dividends= $50,100
    Cash received from issuing stock is calculated as under-

      Cash received from issuing stock =No. of shares × Price per shareCash received from issuing stock =2,500shares×$20Cash received from issuing stock =$50,000

    Now, cash flow from financing activities will be calculated as −

       Cash used in financing activities=Cash borrowed on shortterm note+ Cash received from issuing stock  Cash paid for longterm note Cash paid for dividends Cash used in financing activities=$4,000+$50,000$501,25$50,100Cash used in financing activities=($46,225)

    The cash used in financing activities = ($46,225).
    Now, we need to calculate net increase/ (decrease in cash)-

       Net decrease in cash=Cash flows from operating activitiesCash used in investing activities Cash used in financing activitiesNet decrease in cash=$40,900$18,375$46,225Net decrease in cash=$23,700

    Last step is to calculate Ending cash balance-
    Given,

    • Cash balance for 2014=$73,500

    •   Ending cash balance = Net decrease in cash + Cash balance for 2014Ending cash balance =( $23,700)+$73,500Ending cash balance =$49,800

    Conclusion

    Thus, cash flow statement using direct method has been prepared.

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