Financial Accounting Fundamentals
Financial Accounting Fundamentals
6th Edition
ISBN: 9781259726910
Author: John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher: McGraw-Hill Education
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Chapter 12, Problem 12E
To determine

Prepare the statement of cash flows for the year ended June 30, 2017.

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Explanation of Solution

Statement of cash flows: Statement of cash flows 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.

Cash flows from operating activities: Cash flows from operating activity represent the net cash flows from the general operation of the business by comparing the cash receipt and cash payments.

Direct method: The direct method uses the cash basis of accounting for the preparation of the statement of cash flows. It takes into account those revenues and expenses for which cash is either received or paid.

The below table shows the way of calculation of cash flows from operating activities using direct method:

Cash flows from operating activities (Direct method)
 
Add: Cash receipts.
         Cash receipt from customer
 
Less: Cash payments:
To supplier
Interest expense
For operating expenses
Income tax expenses
Net cash provided from or used by operating activities

Table (1)

Cash flows from investing activities: Cash provided by or used in investing activities is a section of statement of cash flows. It includes the purchase or sale of equipment or land, or marketable securities, which is used for business operations.

Cash flows from investing activities
 
Add: Proceeds from sale of fixed assets
         Sale of marketable securities / investments
         Dividend received
 
Deduct: Purchase of fixed assets/long-lived assets
              Purchase of marketable securities
Net cash provided from or used by investing activities

Table (2)

Cash flows from financing activities: Cash provided by or used in financing activities is a section of statement of cash flows. It includes raising cash from long-term debt or payment of long-term debt, which is used for business operations.

Cash flows from financing activities
 
Add: Issuance of common stock
          Proceeds from borrowings
          Proceeds from sale of treasury stock
          Proceeds from issuance of debt
 
Deduct: Payment of dividend
              Repayment of debt
              Interest paid
              Redemption of debt
              Purchase of treasury stock
Net cash provided from or used by financing activities

Table (3)

The statement of cash flows for the year ended June 30, 2017:

Financial Accounting Fundamentals, Chapter 12, Problem 12E

Table (4)

Working notes:

The amount of cash receipts from customers.

Step 1: Calculate the change in accounts receivable.

Change in accounts receivable=(Ending balanceBeginning balance)=$65,000$51,000=$14,000(Increase)

Step 2: The Calculate the amount of cash receipts from customers.

CashreceiptsfromCustomers]=Salesrevenue (+Decrease in Accounts ReceivableORIncrease in Accounts Receivable)= Sales Revenue Increase in Accounts Receivable=$678,000$14,000=$664,000

Calculate the cash payments to suppliers.

Step 1: Calculate the change in inventory.

Change in inventory=(Ending balanceBeginning balance)=$63,800$86,500=$22,700(Decrease)

Step 2: Calculate the change in accounts payable.

Change in accounts payable=(Ending balanceBeginning balance)=$25,000$30,000=$5,000(Decrease)

Step 3: Calculate the amount of cash payments to suppliers.

(Cashpaid to suppliers)=Cost of Goods Sold (+Decrease in Accounts Payable/Increase in InventoryORIncrease in Accounts Payable /Decrease in Inventory)=(Cost of goods sold + Decrease in accounts payable  Decrease in inventory)=$411,000+$5,000$22,700=$393,300

Calculate the amount of cash paid for other operating expenses:

Step 1: Calculate the change in prepaid expenses.

Change in prepaid expenses =(Ending balanceBeginning balance)=$4,400$5,400=$1,000(Decrease)

Step 2: Calculate the change in wages payable.

Change in wages payable=(Ending balanceBeginning balance)=$6,000$15,000=$9,000(Decrease)

Step 3: Calculate the amount of cash paid for other operating expenses.

(Cash payments for Operating  expenses)={Operating expenses[(+Increase in prepaid of insurance/Decrease in other accrued liabilities)                         OR(Decrease in prepaid insurance/Increase in accrued expense payable)]}=[Operating expensesDecrease in prepaid expenses +Decrease in wages payable]==$67,000$1,000+$9,000=$75,000

Calculate the amount of cash paid for income tax expenses:

Step 1: Calculate the change in income taxes payable.

Change in income taxes payable =(Ending balanceBeginning balance)=$3,400$3,800=$400(Decrease)

Step 2: Calculate the amount of cash paid for income taxes.

(Cash paid for Income taxes)=Income tax expense(+Decrease in income tax payableORIncrease in income tax payable)=(Income tax expense + Decrease in income tax payable)=($43,890 + $400)=$44,290

Calculate the cash receipt from sale of equipment:

DetailsAmount ($)Amount ($)
Cost of equipment sold48,600 
Less: Accumulated depreciation(40,600) 
Book value of equipment 8,000
Gain on sale of equipment2,000
Cash receipt from sale of equipment $10,000

Table (2)

Calculate the amount of cash paid for new equipment:

Cash paid for new equipment = (Cost of equipment sold + Net increase in the equipment account balance)=($48,600 + $9,000)=$57,600

Calculate the amount of dividend paid:

Retained earning in 2017 = (Retained earning in 2016 + Net incomeDividends)$33,300 = $24,100+$99,510DividendDividend=$24,100+$99,510$33,300=$123,610$33,300=$90,310

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Chapter 12 Solutions

Financial Accounting Fundamentals

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