Chapter 12, Problem 12.10AP

To determine

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.

Cash flows from operating activities: These refer to the cash received or cash paid in day-to-day operating activities of a company.

Direct method: This method uses the basis of cash for preparing the cash flows of statement.

Cash flows from operating activities: In this direct method, cash flow from operating activities is computed by using all cash receipts and cash payments during the year.

1. A. Cash Receipts: It encompasses all the cash receipts from sale of goods and on account receivable.
2. B. Cash Payments: It encompasses all the cash payments that are made to suppliers of goods and all expenses that are paid.

Cash flow from investing activities: This section of cash flows statement provides information concerning about the purchase and sale of capital assets by the company.

• Deduct the amount of cash used to purchase any fixed assets.
• Add the amount of cash received from sale of any fixed asset.

Cash flow from financing activities: This section of cash flows statement provides information about the cash inflow and outflow as a result of issuance and financing of debt, issue of new stock and payment of dividends.

• Add the amount of cash received from any sources of finance.
• Deduct the amount of cash used for payment for dividend and interest from financing activities.
• Deduct the amount of cash used for payment of treasury stock from financing activities.

To Prepare: Statement of cash flows of G Incorporation using direct method.

Answer to Problem 12.10AP

G Incorporation
Statement of Cash Flows– Direct Method
For the year ended 2017
Particulars	Amount ($)	Amount ($)
Cash flows from operating activities:
Collections from customers(1)		338,660
Deduct: Payments to suppliers(2)	110,410
Payment for operating expense(3)	19,310
Payment for income taxes	27,280
Payment for interest expense	4,730
Total Payments		(161,730)
Net cash provided by operating activities		176,930
Cash flows from investing activities:
Sale of plant assets	1,500
Purchase of investment	(29,000)
Purchase of plant assets	(100,000)
Net cash used for investing activities		127,500
Cash flows from financing activities:
Issuance of common stock	45,000
Redemption of bonds payable	(36,000)
Payment of cash dividends	(26,030)
Net cash used for financing activities		(17,030)
Net increase (decrease) in cash		32,400
Cash balance, December 31, 2016		48,400
Cash balance, December 31, 2017		80,800

Working notes:

Calculate the cash received from customers as follows:

$\begin{array}{c}\begin{array}{l}\text{Cash receipts }\\ \text{from Customers}\end{array}]=\text{Sales revenue}\left[\begin{array}{c}+\text{ Decrease in Accounts Receivable }\\ \text{or }\\ -\text{ Increase in Accounts Receivables}\end{array}\right]\\ =\text{Sales revenue}-\text{Increase in Accounts Receivables}\\ \text{=\$388,460}-\$49,800\\ =\$338,660\end{array}$ (1)

Calculate the amount of cash paid to suppliers as follows:

$\begin{array}{c}\begin{array}{l}\text{Cash paid }\\ \text{to Suppliers}\end{array}]=\text{Cost of Goods Sold}\left[\begin{array}{l}+\text{Decrease in Accounts Payable}\\ \text{/ Increase in Inventory}\\ \text{or}\\ -\text{Increase in Accounts Payable}\\ \text{/ Decrease in Inventory}\end{array}\right]\\ =\text{Cost of Goods Sold}+\text{Increase in Inventory}-\text{Increase in Accounts Payable}\\ \text{=}\left(\begin{array}{l}\text{\$135,460}+\text{\$9,650}\\ -\text{\$34,700}\end{array}\right)\\ =\$110,410\end{array}$ (2)

Calculate cash payment for operating expenses as follows:

$\begin{array}{c}\begin{array}{l}\text{Cash paid for }\\ \text{operating expenses}\end{array}]=\left[\begin{array}{l}\text{Operating expenses excluding <x-custom-btb-me data-me-id="391" class="microExplainerHighlight">depreciation</x-custom-btb-me> +}\\ \left(\begin{array}{l}\text{Increase in }\\ \text{prepaid expenses}\\ +\text{Decrease in other }\\ \text{accrued liabilities}\end{array}\right)\end{array}\right]\\ =\left[\text{Operating expenses }+\left[\begin{array}{l}\text{Increase in prepaid expenses}+\\ \text{Decrease in accrued expense payable}\end{array}\right]\right]\\ \text{=}\left(\begin{array}{l}\text{\$12,410}+\text{\$2,400}\\ +\text{\$4,500}\end{array}\right)\\ =\$19,310\end{array}$ (3)

The increase or decrease in

Schedule of change in assets and liabilities
Account Titles	Amount ($)
	2017	2016	Increase / (Decrease)	Indicate
Investment	109,000	138,000	29,000	Purchase of investment
Common stock	220,000	175,000	45,000	Issue of common stock
Bonds payable	110,000	146,000	(36,000)	Decrease in redemption of bonds payable

Explanation of Solution

The net cash provided by operating activities is calculated by deducting all cash payments incurred in the operating of the business from all cash receipts from the operating activities of the business. Here, cash receipt includes cash receipts from customers. Cash payments include all cash payments made to suppliers and operating activities.

Cash flow from investing activities is calculated by accounting for inflows and outflows of changes in investments and long terms assets.

Cash flow from financing activities is calculated by accounting for inflows and outflows of changes in long term liabilities and shareholders’ equity items.

Conclusion

Hence, Net increase in cash balance during the period is $32,400.