Statement of cash flows:
The statement of cash flow is a financial statement, which provides a summary of actual or anticipated
Journal is the primary record of the business transaction in chronological (date wise) order. Journal entry contains two effects, one is debit and the other is credit, under the double entry book keeping system.
To prepare: Summary journal entries reflecting changes in consecutive
Explanation of Solution
Prepare the journal entries as shown below.
Decrease in the account receivable:
Date | Particulars | L/F | Amount ($) |
Amount ($) |
---|---|---|---|---|
Cash | 200 | |||
200 | ||||
(To record the account receivable) |
Table (1)
• Cash is an asset account. Here, cash has been received from accounts receivable which increases the cash of the company. So, cash account is debited.
• Accounts receivable account is an asset account. Here, accounts receivable is decreased. So, the accounts receivable account is credited.
Purchase the inventory by cash:
Date | Particulars | L/F | Amount ($) |
Amount ($) |
---|---|---|---|---|
Inventory account | 440 | |||
Cash | 440 | |||
(To record the purchase of the inventory) |
Table (2)
• Inventory is an assets account. Here, the inventory of the company is decreasing which decreases the asset of the company. So, the inventory account is debited.
• Cash is an asset account. Here, cash of the company is decreasing which decreases the asset value of the company. So the assets account is credited.
Decrease in the prepaid expenses:
Date | Particulars | L/F | Amount ($) |
Amount ($) |
---|---|---|---|---|
Expenses | 20 | |||
Prepaid expense | 20 | |||
(To record the prepaid expenses) |
Table (3)
• Expenses being an expense account it increases and equity decreases. Hence, expense account is debited.
• Prepaid expense is an assets account. Here, the prepaid expense decreases so, prepaid expense account is credited.
Increase in the prepaid expenses
Date | Particulars | L/F | Amount ($) |
Amount ($) |
---|---|---|---|---|
Prepaid rent | 40 | |||
Cash | 40 | |||
(To record the prepaid rent) |
Table (4)
• Prepaid rent is an assets account. Here, rent has been paid in advance which increases the assets of the company. So, prepaid expense is debited.
• Cash account is an asset account. Here, cash has been received by the company which increases the assets of the company. So, cash account is debited.
Decrease in the account payable:
Date | Particulars | L/F | Amount ($) |
Amount ($) |
---|---|---|---|---|
Accounts payable | 200 | |||
Cash | 200 | |||
(To record the accounts payable) |
Table (5)
• Accounts payable is a liability account. Since, accounts payable reduces the equity of the company, so it must be debited.
• Cash is an asset account. Since, the cash of the company is reducing, so, it must be credited.
Decrease in the prepaid expenses:
Date | Particulars | L/F | Amount ($) |
Amount ($) |
---|---|---|---|---|
Salary expense | 180 | |||
Salaries payable | 180 | |||
(To record the salaries payable) |
Table (6)
• Salaries expense account is an expense account. Here, salaries expense of the company is increasing. So, the salaries expense account is debited.
• Salaries payable is a liabilities account. Here, salaries payable is increasing which increases the liabilities of the company. So, the salaries payable account is credited.
Increase in utilities payable:
Date | Particulars | L/F | Amount ($) |
Amount ($) |
---|---|---|---|---|
Utilities expense | 60 | |||
Utilities payable | 60 | |||
(To record the utilities payable) |
Table (7)
• Utilities expense account is an expense account. Here, utilities expense of the company is increasing. So, the utilities expense account is debited.
• Utilities payable is a liabilities account. Here, utilities payable is increasing which increases the liabilities of the company. So, the utilities payable account is credited.
Now, prepare the cash flow statement using the direct method as shown below.
Particulars | 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 notes:
1. Calculate the cash received from customer.
Thus, the cash receipt from customer is $97,400.
2. Calculate the cash paid for rent.
Thus, the cash paid for rent is $9,040.
3. Calculate the salaries payable.
Thus, the cash paid for salaries is $17,820.
4. Calculate the cash paid for insurance.
Thus, cash paid for insurance is $3,780.
5. Calculate the cash paid for utilities.
Thus, cash paid for utilities is $2,740.
6. Calculate the cash paid to acquire inventory.
Thus, cash paid to acquire inventory is $42,640.
Now, prepare the cash flow statement using the indirect method as shown below.
Particulars | Amount ($) |
---|---|
Cash flow from operating activities | |
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 (13)
Working note:
1. Calculate the amount of net working capital.
Particulars | 2015 | 2014 | Increase/ Decrease |
---|---|---|---|
Accounts 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 | ||
Accounts 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 (14)
Hence, the journal entries reflecting changes in consecutive trial balances are prepared as above.
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