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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Cash flows from operating activities—direct method

The cash flows from operating activities are reported by the direct method on the statement of cash flows. Determine the following:

  1. a. If sales for the current year were $753,500 and accounts receivable decreased by $48,400 during the year, what was the amount of cash received from customers?
  2. b. If income tax expense for the current year was $50,600 and income tax payable decreased by $5,500 during the year, what was the amount of cash payments for income taxes?
  3. c. Briefly explain why the cash received from customers in (a) is different from sales.

a.

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: The direct method uses the cash basis of accounting for the preparation of the statement of cash flows. It takes into account those revenues and expenses for which cash is either received or paid.

Cash flows from operating activities: Cash flows from operating activity represent the net cash flows from the general operation of the business by comparing the cash receipt and cash payments.

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.

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

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

To Determine: The amount of cash received from customers.

Explanation

Cash receipts from customers represent the total amount of cash received from the sales as well...

b.

To determine
The amount of cash payments for income taxes.

c.

To determine

To Explain: Why the cash received from customers is different from sales.

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