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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 income statement of Booker T Industries Inc. for the current year ended June 30 is as follows:

Sales.........................................   $511,000
Cost of merchandise sold......................   290,500
Gross profit...................................   $220,500
Operating expenses:
Depreciation expense..................... $ 39,500  
Other operating expenses................. 105,000  
Total operating expenses..............   144,200
Income before income tax....................   $ 76,300
Income tax expense..........................   21,700
Net income...................................   $ 54,600

Changes in the balances of selected accounts from the beginning to the end of the current year are as follows:

 

Increase

(Decrease)

Accounts receivable (net) $(11,760)
Inventories 3,920
Prepaid expenses (3,780)
Accounts payable (merchandise creditors) (7,980)
Accrued expenses payable (operating    expenses) 1,260
Income tax payable (2,660)

a. Prepare the Cash flows from operating activities section of the statement of cash flows, using the direct method

b. What does the direct method show about a company’s cash flows from operating activities that is not shown using the indirect method?

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

Table (1)

To Prepare: The cash flows from operating activities section of the statement of cash flows using direct method.

Explanation

Working notes:


Calculate the amount of cash received from customers:

(Cash received from customers)=[Salesrevenue (+Decrease in Accounts ReceivableORIncrease in Accounts Receivable)]=(Salesrevenue + Decrease in Accounts Receivable)=($511,000+$11,760)=$522,760

Calculate the amount of cash paid for merchandise:

Cash paid for merchandise=[Cost of Goods Sold (+Decrease in Accounts Payable/Increase in InventoryORIncrease in Accounts Payable /Decrease in Inventory)]=(Cost of goods sold + Decrease in Accounts Payable +Increase in Inventory)=$290,500+$7,980+$3,920=$302,400

Calculate the amount of cash paid for operating expenses:

b.

To determine

To Explain: The Company’s cash flows from operating activities under direct method.

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