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Cash flows from operating activities—direct method. The income statement for Rhino Company for the current year ended June 30 and balances of selected accounts at the beginning and the end of the year are as follows: Sales........................................... $445,500 Cost of merchandise sold........................ 154,000 Gross profit..................................... $291,500 Operating expenses: Depreciation expense........................ $ 38,500 Other operating expenses.................... 115,280 Total operating expenses.................. 153,780 Income before income tax....................... $137,720 Income tax expense............................. 39,600 Net income..................................... $ 98,120 End Of Year Beginning of Year Accounts receivable (net)............................... $36,300 $31,240 Inventories............................................ 92,400 80,300 Prepaid expenses...................................... 14,520 15,840 Accounts payable (merchandise creditors)............... 67,540 62,700 Accrued expenses payable (operating expenses)......... 19,140 20,900 Income tax payable..................................... 4,400 4,400 Prepare the Cash flows from operating activities section of the statement of cash flows, using the direct method.

BuyFind

Accounting

27th Edition
WARREN + 5 others
Publisher: Cengage Learning,
ISBN: 9781337272094
BuyFind

Accounting

27th Edition
WARREN + 5 others
Publisher: Cengage Learning,
ISBN: 9781337272094

Solutions

Chapter
Section
Chapter 16, Problem 16.23EX
Textbook Problem

Cash flows from operating activities—direct method.

The income statement for Rhino Company for the current year ended June 30 and balances of selected accounts at the beginning and the end of the year are as follows:

Sales........................................... $445,500
Cost of merchandise sold........................ 154,000
Gross profit..................................... $291,500
Operating expenses:
Depreciation expense........................ $ 38,500
Other operating expenses.................... 115,280
Total operating expenses.................. 153,780
Income before income tax....................... $137,720
Income tax expense............................. 39,600
Net income..................................... $ 98,120

End

Of Year

Beginning

of Year

Accounts receivable (net)............................... $36,300 $31,240
Inventories............................................ 92,400 80,300
Prepaid expenses...................................... 14,520 15,840
Accounts payable (merchandise creditors)............... 67,540 62,700
Accrued expenses payable (operating expenses)......... 19,140 20,900
Income tax payable..................................... 4,400 4,400

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

Expert Solution
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 of Solution

Working notes:


Calculate the amount of cash received from customers:

(Cash received from customers)=[Salesrevenue (+Decrease in Accounts ReceivableORIncrease in Accounts Receivable)]=(Salesrevenue  Increase in Accounts Receivable)=($445,500$5,060[31,24036,300])=$440,440

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 

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Chapter 16 Solutions

Accounting
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Ch. 16 - Classifying cash flows Identify whether each of...Ch. 16 - Classifying cash flows Identify whether each of...Ch. 16 - Adjustments to net incomeindirect method Ripley...Ch. 16 - Adjustments to net incomeindirect method Ya Wen...Ch. 16 - Changes in current operating assets and...Ch. 16 - Changes in current operating assets and...Ch. 16 - Cash flows from operating activitiesindirect...Ch. 16 - Cash flows from operating activitiesindirect...Ch. 16 - Land transactions on the statement of cash flows...Ch. 16 - Land transactions on the statement of cash flows...Ch. 16 - Cash received from customersdirect method Sales...Ch. 16 - Cash received from customersdirect method Sales...Ch. 16 - Cash payments for merchandisedirect method The...Ch. 16 - Cash payments for merchandisedirect method The...Ch. 16 - Free cash flow McMahon Inc. reported the following...Ch. 16 - Free cash flow Dillin Inc. reported the following...Ch. 16 - Cash flows from operating activities On its income...Ch. 16 - Effect of transactions on cash flows State the...Ch. 16 - Classifying cash flows Identify the type of cash...Ch. 16 - Cash flows from operating activitiesindirect...Ch. 16 - Cash flows from operating activitiesindirect...Ch. 16 - Cash flows from operating activitiesindirect...Ch. 16 - Cash flows from operating activitiesindirect...Ch. 16 - Determining cash payments to stockholders The...Ch. 16 - Reporting changes in equipment on statement of...Ch. 16 - Reporting changes in equipment on statement of...Ch. 16 - Reporting land transactions on statement of cash...Ch. 16 - Reporting stockholders equity items on statement...Ch. 16 - Reporting land acquisition for cash and mortgage...Ch. 16 - Reporting issuance and retirement of longterm debt...Ch. 16 - Determining net income from net cash flow from...Ch. 16 - Cash flows from operating activitiesindirect...Ch. 16 - Statement of cash flowsindirect method The...Ch. 16 - Statement of cash flowsindirect method The...Ch. 16 - Cash flows from operating activitiesdirect method...Ch. 16 - Cash paid for merchandise purchases The cost of...Ch. 16 - Determining selected amounts for cash flows from...Ch. 16 - Cash flows from operating activitiesdirect method...Ch. 16 - Cash flows from operating activitiesdirect method....Ch. 16 - Free cash flow Sweeter Enterprises Inc. has cash...Ch. 16 - Free cash flow The financial statement for Nike,...Ch. 16 - Free cash flow Lovato Motors Inc. has cash flows...Ch. 16 - Statement of cash flowsindirect method The...Ch. 16 - Statement of cash flowsindirect method The...Ch. 16 - Statement of cash flowsindirect method The...Ch. 16 - Statement of cash flowsdirect method The...Ch. 16 - Statement of cash flowsdirect method applied to...Ch. 16 - Statement of cash flowsindirect method The...Ch. 16 - Statement of cash flowsindirect method The...Ch. 16 - Statement of cash flowsindirect method The...Ch. 16 - Statement of cash flowsdirect method The...Ch. 16 - Statement of cash flowsdirect method applied to PR...Ch. 16 - Ethics in Action Lucas Hunter, president of...Ch. 16 - Communication Tidewater Inc., a retailer, provided...Ch. 16 - Using the statement of cash flows You are...Ch. 16 - Dillip Lachgar is the president and majority...

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