Chapter 12, Problem 2GLP

To determine

Cash Flow Statement:

Cash flow statement gives the information related to the cash inflow and outflow of the company. It gives the information cash inflow and out flow from the operating, investing and financing activities.

Journal Entries:

Adjusting entries are those entries which are made at the end of the period to follow the matching the principal concept of the account.

To prepare: Journal entries and cash flow statement.

Explanation of Solution

Decrease in the account receivable

Date	Account title and explanation	post ref.	Amount($)	Amount($)
	Cash		200
	Account receivable			200
	(to record the account receivable)

     Table (1)

• Cash is the assets account. Here, cash has been received from the account receivable which increases the cash of the company. So, debit the cash account.
• Account receivable account is the assets account. Here, account receivable is decreased. So credit the account receivable account.

Purchase the inventory by cash

Date	Account title and explanation	post ref.	Amount($)	Amount($)
	Inventory account		440
	Cash			440
	(to record the purchase of the inventory)

     Table (2)

• Inventory is the assets account. Here, the inventory of the company is decreasing which decreases the asset of the company. So, debit the inventory account.
• Cash is the asset account. Here, cash of the company is decreasing which decrease the asset value of the company. So credit the assets account.

Decrease in the prepaid expenses

Date	Account title and explanation	post ref.	Amount($)	Amount($)
	Expense		20
	Prepaid expense			20
	(to record the prepaid expenses)

     Table (3)

• Expense is the expense account. Since expense is increasing it reduces the equity. Hence, debit expense account.
• Prepaid expense is the assets account. Here the prepaid expense is reducing. So, credit the prepaid expense account.

Increase in the prepaid expenses

Date	Account title and explanation	post ref.	Amount($)	Amount($)
	Prepaid rent		40
	Cash			40
	(to record the prepaid rent)

     Table (4)

• Prepaid rent is the assets account. Here, rent has been paid in advance which increase the assets of the company. So, debit the prepaid expense.
• Cash is the asset account. Here, cash of the company is decreasing which decrease the asset value of the company. So credit the assets account.

Decrease in the account payable

Date	Account title and explanation	post ref.	Amount($)	Amount($)
	Account payable		200
	Cash			200
	(to record the account payable)

     Table (5)

• Account payable is the liability account. Since account payable reduces the equity of the company. Hence, debit the account payable.
• Cash is the assets account. Since, the cash of the company is reducing. Hence, credit the cash account.

Increase in salaries payable

Date	Account title and explanation	post ref.	Amount($)	Amount($)
	Salary expense		180
	Salaries payable			180
	(to record the salaries payable)

     Table (6)

• Salaries expense account is the expense account. Here, salaries expense of the company is increasing. So, debit the salaries expense account.
• Salaries payable is the liabilities account. Here, salaries payable is increasing which increase the liabilities of the company. So, credit the salaries payable account.

Increase in utilities payable

Date	Account title and explanation	post ref.	Amount($)	Amount($)
	Utilities expense		60
	Utilities payable			60
	(to record the utilities payable)

     Table (7)

• Utilities expense account is the expense account. Here, utilities expense of the company is increasing. So, debit the utilities expense account.
• Utilities payable is the liabilities account. Here, utilities payable is increasing which increase the liabilities of the company. So, credit the utilities payable account.

Cash flow statement (direct method)

Cash flow from operating activities (direct method)	Amount($)
Cash receipts form customer	97,400
Cash paid for rent	(9,040)
Cash paid for salaries	(17,820)
Cash paid for insurance	(3,780)
Cash paid for interest	(3,600)
Cash paid for utilities	(2,740)
Cash paid for inventory	(42,640)
Net cash flow from operating activities	17,780

     Table (8)

Working note:

Given,

Sales revenue is $97,200.

Account receivable for the year 2016 is $5,800.

Account receivable for the year 2017 is $5,600.

Computation of cash received from customer,

  $\begin{array}{c}\text{Cash}\text{receipt}\text{from}\text{customer}s=\left(\begin{array}{l}\text{Sales}\text{revenue}+\text{Account}\text{receivable}2016\\ -\text{Account}\text{recevable}2017\end{array}\right)\\ =\$97,200+\$5,800-\$5,600\\ =97,400\end{array}$

Cash receipt from customer is $97,400.

Given,

Rent expense is $9,000.

Prepaid rent for the year 2017 is $220.

Prepaid rent for the year 2016 is $180.

Computation of the cash paid for rent,

  $\begin{array}{c}\text{Cash}\text{paid}\text{for}\text{rent}=\text{Rent}\text{expense}+\text{Prepaid}\text{rent}2017-\text{Prepaid}\text{rent}2016\\ =\$9,000+\$220-\$180\\ =\$9,040\end{array}$

Cash paid for rent is $9,040.

Given,

Salaries expense is $18,000.

Salaries payable for the year 2016 is $700.

Salaries payable for the year 2017 is $880

Computation of the salaries payable,

  $\begin{array}{c}\text{Cash}\text{paid}\text{for}\text{salaries}=\left(\begin{array}{l}\text{Salaries}\text{expense}+\text{Salaries}\text{payable}2016\\ -\text{Salaries}\text{payable}2017\end{array}\right)\\ =\$18,000+\$700-\$880\\ =\$17,820\end{array}$

Cash paid for the salaries is $17,820.

Given,

Insurance expense is $3,800.

Prepaid insurance for the year 2017 is $260.

Prepaid insurance for the year 2016 is $280.

Computation of cash paid for insurance,

  $\begin{array}{c}\text{Cash}\text{paid}\text{for}\text{insurance}=\left(\begin{array}{l}\text{Insurance}\text{expense}+\text{Prepaid}\text{insurance}2017\\ -\text{Prepaid}\text{insurance}2016\end{array}\right)\\ =\$3,800+\$260-\$280\\ =\$3,780\end{array}$

Cash paid for insurance is $3,780.

Given,

Utilities expense is $2,800.

Utilities payable for the year 2016 is $160.

Utilities payable for the year 2017 is $220.

Computation of cash paid for utilities,

  $\begin{array}{c}\text{Cash}\text{paid}\text{for}\text{utilities}=\left(\begin{array}{l}\text{Utilities}\text{expense}+\text{Utilities}\text{payable}2016\\ -\text{Utilities}\text{payable}2017\end{array}\right)\\ =\$2,800+\$160-\$220\\ =\$2,740\end{array}$

Cash paid for utilities is $2,740.

Given,

Cost of goods sold is $42,000.

Opening inventory is $ 1,540.

Closing inventory is $ 1,980

Account payable for the year 2016 is $4,600.

Account receivable for the year is $4,400.

Computation of cash paid to acquire inventory,

  $\begin{array}{c}\text{Cash}\text{paid}\text{to}\text{acquire}\text{inventory}=\left[\begin{array}{c}\text{Cost}\text{of}\text{goods}\text{sold}\\ +\left(\text{Closing}\text{inventory}-\text{Openinge}\text{inventory}\right)\\ +\left(\begin{array}{l}\text{Account}\text{payable}2016\\ -\text{Account}\text{payable}2017\end{array}\right)\end{array}\right]\\ =\$42,000+\left(\$1,980-\$1,540\right)+\left(\$4,600-\$4,400\right)\\ =\$42,640\end{array}$

Cash paid to acquire inventory is $42,640.

Cash flow statement (Indirect method)

Cash flow from operating activities	Amount($)
Net income	6,000
Adjustment for noncash expense
Add: Depreciation expense	12,000
Adjustment for working capital changes:
Less Increase in net working capital	(220)
Net cash flow from operating activities	17,780

     Table (9)

Working note:

Calculate the amount of the net working capital

Particulars	2017	2016	Increase/decrease
Account receivable	5,600	5,800	(200)
Inventory	1,980	1,540	440
Prepaid rent	220	280	(60)
Prepaid insurance	260	180	80
Increase/decrease in current assets (A)			260
Account payable	4,400	4,600	(200)
Salaries payable	880	700	180
Utilities payable	220	160	60
Increase/decrease in current liabilities (B)			40
Increase/decrease in working capital(A)-(B)			220

     Table (10)