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Financial Accounting

15th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781337272124

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BuyFindarrow_forward

Financial Accounting

15th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781337272124
Chapter 16, Problem 1DQ
Textbook Problem
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What is the principal advantage and the principal disadvantage of the direct method of reporting cash flows from operating activities?

To determine

Determine the advantage and disadvantage of the direct method of reporting cash flows from operating activities.

Explanation of Solution

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: This method uses the basis of cash for preparing the cash flows statement.

Cash flows from operating activities: These refer to the cash received or cash paid in day-to-day operating activities of a company.  In this direct method, cash flow from operating activities is computed by using all cash receipts and cash payments during the year.

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

Advantages:

  • The main advantage of direct method presents the operating cash receipts and cash payments to estimate the future cash flows in the statement of cash flows.
  • This is similar to the income statement as it is familiar to the users of financial statement.

Disadvantages:

  • The main disadvantage is that the cash receipts and cash payments data’s might not be readily available in the accounting records.
  • This method (direct method) is not frequently prepared or used in practice.
  • The required data to calculate operating activities section will be an expensive one and it is a time –consuming process.

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Chapter 16 Solutions

Financial Accounting
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Ch. 16 - Identify whether each of the following would be...Ch. 16 - Identify whether each of the following would be...Ch. 16 - Ripley Corporations accumulated...Ch. 16 - Ya Wen Corporations accumulated...Ch. 16 - Zwilling Corporations comparative balance sheet...Ch. 16 - Huluduey Corporations comparative balance sheet...Ch. 16 - Demers Inc. reported the following data: Prepare...Ch. 16 - Staley Inc. reported the following data: Prepare...Ch. 16 - Simkin Corporation purchased land for 420,000....Ch. 16 - IZ Corporation purchased land for 400,000. Later...Ch. 16 - Sales reported on the income statement were...Ch. 16 - Sales reported on the income statement were...Ch. 16 - The cost of merchandise sold reported on the...Ch. 16 - The cost of merchandise sold reported on the...Ch. 16 - McMahon Inc. reported the following on the...Ch. 16 - Dillin Inc. reported the following on the companys...Ch. 16 - On its income statement for a recent year,...Ch. 16 - State the effect (cash receipt or payment and...Ch. 16 - Identify the type of cash flow activity for each...Ch. 16 - Indicate whether each of the following would be...Ch. 16 - The net income reported on the income statement...Ch. 16 - The net income reported on the income statement...Ch. 16 - The income statement disclosed the following items...Ch. 16 - The board of directors declared cash dividends...Ch. 16 - An analysis of the general ledger accounts...Ch. 16 - An analysis of the general ledger accounts...Ch. 16 - On the basis of the details of the following fixed...Ch. 16 - On the basis of the following stockholders equity...Ch. 16 - On the basis of the details of the following fixed...Ch. 16 - On the basis of the details of the following bonds...Ch. 16 - Curwen Inc. reported net cash flow from operating...Ch. 16 - Selected data derived from the income statement...Ch. 16 - The comparative balance sheet of Olson-Jones...Ch. 16 - The following statement of cash flows for Shasta...Ch. 16 - The cash flows from operating activities are...Ch. 16 - The cost of merchandise sold for Kohls Corporation...Ch. 16 - Selected data taken from the accounting records of...Ch. 16 - The income statement of Booker T Industries Inc....Ch. 16 - The income statement for Rhino Company for the...Ch. 16 - Sweeter Enterprises Inc. has cash flows from...Ch. 16 - The financial statements for Nike, Inc., are...Ch. 16 - Lovato Motors Inc. has cash flows from operating...Ch. 16 - The comparative balance sheet of Navaria Inc. for...Ch. 16 - The comparative balance sheet of Yellow Dog...Ch. 16 - The comparative balance sheet of Whitman Co. at...Ch. 16 - The comparative balance sheet of Canace Products...Ch. 16 - The comparative balance sheet of Navaria Inc. for...Ch. 16 - The comparative balance sheet of Merrick Equipment...Ch. 16 - The comparative balance sheet of Harris Industries...Ch. 16 - The comparative balance sheet of Coulson, Inc. at...Ch. 16 - The comparative balance sheet of Martinez Inc. for...Ch. 16 - The comparative balance sheet of Merrick Equipment...Ch. 16 - Lucas Hunter, president of Simmons Industries...Ch. 16 - Tidewater Inc., a retailer, provided the following...Ch. 16 - You are considering an investment in a new...Ch. 16 - Dillip Lachgar is the president and majority...

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