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Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773

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BuyFindarrow_forward

Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773
Textbook Problem
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Booth Manufacturing has provided the following financial statements.

Chapter 14, Problem 48P, Booth Manufacturing has provided the following financial statements. Other information includes: (a)

 Other information includes: (a) equipment with a book value of $125,000 was sold for $175,000 (original cost was $225,000) and (b) dividends of $225,000 were declared and paid.

 Required:

  1. 1. Calculate the cash flows from operations using the indirect method.
  2. 2. Prepare a statement of cash flows.
  3. 3. CONCEPTUAL CONNECTION Search the Internet to find a statement of cash flows. Which method was used—the indirect method or the direct method? How does the net income reported compare to the operating cash flows? To the change in cash flows?

1.

To determine

Compute the cash flows from operations with the use of indirect method.

Explanation

Cash Flows from Operating Activities:

This category of a cash flow statement shows the operational and profit generating activities in a firm. The operating cash flows increase or decrease the current assets and current liabilities of a firm.

The cash flows from operations for B Company for 20X2 using indirect method is shown below:

ParticularsAmount ($)
Cash flows from operating activities: 
Net income450,000
Add/ Less: 
    Decrease in accounts receivable168,750
    Decrease in accounts payable2(62,500)
    Increase in inventories3(25,000)
    Depreciation expense4125,000
    Gain on sale of equipment5(50,000)
Net cash from operating activities506,250

Table (1)

Therefore, the net cash from operating activities is $506,250.

Working Note:

1.

Calculation of difference in accounts receivable:

(DifferenceinAccountsReceivable)=(AmountofAccountsReceivableof20X2AmountofAccountsReceivableof20X1)=($281,250$350,000)=$68,750

2.

Calculation of difference in accounts payable:

(DifferenceinAccountsPayable)=(AmountofAccountsPayableof20X2AmountofAccountsPayableof20X1)=($237,500$300,000)=$62,500

3

2.

To determine

Chart the statement of cash flows.

3.

To determine

Identify the method used in preparing the statement of cash flows of a company. Also, explain the manner in which the net income is compared with the operating cash flows and to the change in cash flows.

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