Chapter 12, Problem 12.5CP

To determine

To prepare: the cash flows from operating activities section of the statement of cash flowsHamburger Heaven for the yearended December 31, 20 15, using the direct method.

Answer to Problem 12.5CP

Prepare the cash flows from operating activities (direct method) of Company HH for the year ended December 31, 2015.

Cash flows from operating activities:
Cash receipts from customers (1)	$2,130
Cash payments to suppliers (2)	(932)
Cash payments for salaries and wages  (3)	(491)
Cash payments for rent (4)	(242)
Cash payments for insurance (5)	(89)
Cash payments for utilities (6)	(90)
Cash payments for interest	(60)
Net cash provided by operating activities	$ 226

Table (1)

Working notes:

1. 1. Calculate cash receipts from customers.

$\begin{array}{c}\text{Cash receipts from customers}\text{=}\text{sales + }\left(\begin{array}{l}\text{Opening accounts}\\ \text{ receivables}\end{array}\right)\text{ - }\left(\begin{array}{l}\text{Closing accounts}\\ \text{ receivables}\end{array}\right)\\ =\$2,060+\$450-\$380\\ =\$2,130\end{array}$ (1)

1. 2. Calculate cash payments to suppliers.

$\begin{array}{c}\text{Cash payments to suppliers =}\{\begin{array}{l}\text{Cost}\text{of}\text{goods}\text{sold + }\left(\text{Closing inventory }-\text{ Opening}\text{inventory}\right)+\\ \left(\text{Opening accounts payable}-C\text{losing accounts payable}\right)\end{array}\\ =\$900+\left(\$82-\$60\right)+\left(\$210-\$200\right)\\ =\$932\end{array}$ (2)

1. 3. Calculate cash payments for salaries and wages expenses.

$\begin{array}{c}\begin{array}{l}\text{Cash payments}\\ \text{ for salaries }\\ \text{and wages}\end{array}\}\text{=}\left(\begin{array}{l}\text{Salaries and}\\ \text{ wages expenses}\end{array}\right)-\left(\begin{array}{l}\text{Opening }\\ \text{accounts}\\ \text{ receivables}\end{array}\right)\text{ + }\left(\begin{array}{l}\text{Closing}\\ \text{ accounts}\\ \text{ receivables}\end{array}\right)\\ =\$500-\$29+\$20\\ =\$491\end{array}$ (3)

1. 4. Calculate cash payment for rent.

   $\begin{array}{c}\begin{array}{l}\text{Cash payments}\\ \text{ for rent}\end{array}\}\text{=}\left(\begin{array}{l}\text{Rent}\\ \text{ expenses}\end{array}\right)-\left(\begin{array}{l}\text{Opening rent}\\ \text{ expense}\end{array}\right)\text{ + }\left(\begin{array}{l}\text{Closing rent}\\ \text{ expense}\end{array}\right)\\ =\$250-\$10+\$2\\ =\$242\end{array}$ (4)

2. 5. Calculate cash payments for Insurance

   $\begin{array}{c}\begin{array}{l}\text{Cash payments}\\ \text{ for insurance}\end{array}\}\text{=}\left(\begin{array}{l}\text{Insurance}\\ \text{ expenses}\end{array}\right)\text{ + }\left(\begin{array}{l}\text{Opening insurance}\\ \text{ expense}\end{array}\right)-\left(\begin{array}{l}\text{Closing insurance}\\ \text{ expense}\end{array}\right)\\ =\$80+\$14-\$5\\ =\$89\end{array}$ (5)

3. 6. Calculate cash payments for utilities

   $\begin{array}{c}\begin{array}{l}\text{Cash payments}\\ \text{ for utilities}\end{array}\}\text{=}\left(\begin{array}{l}\text{Utilities}\\ \text{ expenses}\end{array}\right)\text{ + }\left(\begin{array}{l}\text{Opening utilities}\\ \text{ expense}\end{array}\right)-\left(\begin{array}{l}\text{Closing utilities}\\ \text{ expense}\end{array}\right)\\ =\$50+\$60-\$20\\ =\$90\end{array}$ (6)

Explanation of Solution

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

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