Chapter 13, Problem 1DQ

To determine

Statement of cash flows: It is one of the financial statement that shows the cash and cash equivalents of a company for a particular period. It determines the net changes in cash through reporting the sources and uses of cash due to the operating, investing, and financing activities of a company.

Direct method: This method uses the basis of cash for preparing the cash flows statement.

Cash flows from operating activities: These refer to the cash received or cash paid in day-to-day operating activities of a company.  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.

Cash flows from operating activities (Direct method)

Add: Cash receipts.

Cash receipt from customer

Less: Cash payments:

To supplier

For operating expenses

Income tax expenses

Net cash provided from or used by operating activities

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

To Determine: The disadvantage of the direct method of reporting cash flows from operating activities.

Explanation of Solution

• The main disadvantage is that the cash receipts and cash payments data’s might not be readily available in the accounting records.
• This method (direct method) not frequently prepared or used in practice.
• The required data to calculate operating activities section will be an expensive one and it is a time –consuming process.