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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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Section
BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
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.

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  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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