Chapter 12, Problem 12E

To determine

Statement of cash flows:

The statement of cash flow is a financial statement, which provides a summary of actual or anticipated cash inflow and cash outflow in a firm over an accounting period. It determines the net changes in cash through reporting the sources and uses of cash due to operating, investing, and financial activities of a company.

The cash flow statement is categorized into three parts as follows:

► Cash flow from operating activities: All those activities that are related to production, sales, and delivery of an organization’s product or service and collection of payments from customers come under this category. For example: Losses, gains, purchase of raw material, inventory, depreciation, and advertising.

► Cash flow from investing activities: When an organization purchases or sells any asset, then whatever cash comes in or goes out are reported under this head of the cash flow statement. If any loan is made to a supplier or received from a customer then, it would be reported in it and if a merger or acquisition exists there, then all the payments related to it would also be recorded in it.

► Cash flow from financing activities: The inflow of cash from investors like bank and shareholders and outflow to shareholders in the form of dividends is recorded under this head of the cash flow statement. All those activities that affect the long-term liabilities or equity of the organization will also be reported under this head.

To prepare: The cash flow statement for the year ended June 30, 2015.

Explanation of Solution

Prepare the cash flow statement as shown below.

Cash flow statement
Particulars	Amount ($)	Amount ($)
Cash flow from operating activities:
Cash collected from customers	664,000
Cash paid to suppliers	(393,300)
Cash paid for other expense	(75,000)
Cash paid for income tax	(44,290)
Cash flow from operating activities (A)		151,410
Cash flow from investing activities:
Cash received on sale of the equipment	10,000
Cash paid for new equipment	(57,600)
Cash flow from investing activities (B)		(47,600)
Cash flow from financing activities:
Cash from issuance of share	60,000
cash paid on retirement	(30,000)
Cash paid for dividend	(90,310)
Cash flow from financing activities (C)		(60,310)
Net increase in cash $\left(\text{A}\right)+\left(\text{B}\right)+\left(\text{C}\right)$		43,500
Cash and cash equivalent, December 31, 2014		44,000
Cash and cash equivalent, December 31, 2015		87,500

Table (1)

Working notes:

1. Calculate the cash collected from the customer.

$\begin{array}{c}\text{Cash}\text{collectod}\text{from}\text{customer}=\text{Sales}\text{revenue}-\text{Increase}\text{in}\text{account}\text{receivable}\\ =\text{\$678,000}-\text{\$14,000}\\ =\text{\$664,000}\end{array}$

2. Calculate the cash paid to supplies.

$\begin{array}{c}\text{Cash}\text{paid}\text{to}\text{supplies}=\left(\begin{array}{l}\text{Cost}\text{of}\text{the}\text{goods}\text{sold}+\text{Decrease}\text{in}\text{account}\text{payable}\\ -\text{Decrease}\text{in}\text{inventory}\end{array}\right)\\ =\$411,000+\$5,000-\$22,700\\ =\$393,300\end{array}$

3. Calculate the cash paid for other expenses.

$\begin{array}{c}\text{Cash}\text{paid}\text{other}\text{expenses}=\left(\begin{array}{l}\text{Other}\text{expense}+\text{Prepaid}\text{expense 2015}-\text{Prepaid}\text{expense 2014}\\ -\text{Wages}\text{payable 2015}+\text{Wages}\text{payable}\text{2014}\end{array}\right)\\ =\text{\$67,000}+\text{\$4,400}-\text{\$5,400}-\text{\$6,000}+\text{\$15,000}\\ =\text{\$75,000}\end{array}$

4. Calculate the cash paid for income tax expenses.

$\begin{array}{c}\text{Cash}\text{paid}\text{for}\text{income}\text{tax}\text{expense}=\left(\begin{array}{c}\text{Income}\text{tax}\text{expense}+\text{Income}\text{tax}\text{2014}\\ -\text{Income}\text{tax}\text{2015}\end{array}\right)\\ =\text{\$43,890}+\text{\$3,800}-\text{\$3,400}\\ =\$44,290\end{array}$

5. Calculate the cash received as dividend.

$\begin{array}{c}\text{Cash}\text{dividends}=\text{Retained}\text{earnings}\text{2014}+\text{Net}\text{income}-\text{Retained}\text{earnings}\text{2015}\\ =\text{\$24,100}+\text{\$99,510}-\text{\$33,300}\\ =\text{\$90,310}\end{array}$

6. Calculate the cash received on the sale of equipment.

Particulars	Amount ($)
Accumulated depreciation 2014	9,000
Add: Depreciation for the year	58,600
Less: Accumulated depreciation	(27,000)
Depreciation on equipment sold	40,600
Original cost of the equipment sold	48,600
Less: Depreciation on equipment	(40,600)
Book value of the equipment sold	8,000
Add: Gain on sale	2,000
Cash received on sale of equipment	10,000

Table (2)

Conclusion

Hence, the cash flow statement for the year ended June 30, 2015 is prepared as above.