a.
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.
a.
Answer to Problem 16.22EX
T Industries | ||
Statement of Cash Flows - Direct Method (Partial) | ||
Year Ended June 30 | ||
Details | Amount ($) | Amount ($) |
Cash flows from operating activities: | ||
Add: Cash receipt: | ||
Cash received from customers | 522,760 | |
Total cash receipt | 522,760 | |
Less: Cash payments: | ||
Cash payment for merchandise | (302,400) | |
Cash payment for operating expenses | (99,960) | |
Cash payment for income taxes | (24,360) | |
Total cash payments | (426,720) | |
Net cash provided by operating activities | $96,040 |
Explanation of Solution
Working notes:
Calculate the amount of cash received from customers:
Calculate the amount of cash paid for merchandise:
Calculate the amount of cash paid for operating expenses:
Calculate the amount of cash payments for income taxes.
Therefore, the net cash provided by operating activities under direct method is $96,040.
b.
To Explain: The Company’s cash flows from operating activities under direct method.
b.
Explanation of Solution
In the direct method shows all the
In the indirect method, adjusts the accrual basis net income for revenues and expenses. Thus, it does not involve the cash receipt or cash payment to arrive at cash flows from
Operating activities.
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