Concept Introduction:
Cash flow statement:
Cash flow statement is one of the financial statements which shows the cash flows of the company during a given period of time.
When cash receipts and cash payments are used for calculating cash flow from operating activities, this method is termed as direct method.
To prepare:
Cash flow statement using direct method
Answer to Problem 5APSA
Solution:
The cash flow from statement using direct method −
FORTEN COMPANY | ||
Statement of cash flows | ||
FOR THE year ended December 31, 2015 | ||
| | |
Particulars | Amount ($) | Amount ($) |
Cash flows from operating activities | | |
Receipts: | ||
Cash receipts from customers | 567,315 | |
Payments: | ||
Cash paid for merchandise | 370,390 | |
Cash paid for other expenses | 131,775 | |
Cash paid for income taxes | 24,250 | |
Total cash payments | (526,415) | |
Net cash provided by operating activities | 40,900 | |
| | |
Cash flows from investing activities | | |
Cash received from sale of equipment | 11,625 | |
Cash paid for equipment | (30,000) | |
Net cash used in investing activities | (18,375) | |
| | |
Cash flows from financing activities | | |
Cash borrowed on short-term note | 4,000 | |
Cash paid for long-term note | (50,125) | |
Cash received from issuing stock | 50,000 | |
Cash paid for dividends | (50,100) | |
Net cash used in financing activities | (46,225) | |
| | |
Net decrease in cash | (23,700) | |
Beginning cash balance | | 73,500 |
Ending cash balance | 49,800 |
Explanation of Solution
- 1. Cash flow from operating activities-
Cash receipts from customers
Given,
- Sales for the year = $ 582,500
Accounts receivables for 2014 = $ 50,625- Accounts receivables for 2015 = $ 65,810
Next, cash payments for the year will be calculated.
There are three cash payments during the year related to operating activities-
- Cash paid for merchandise
- Cash paid for other expenses
- Cash paid for income taxes
Cash paid for merchandise
Given,
- Cost of goods sold = $285,000
- Accounts payables for 2014 = $114,675
- Accounts payables for 2015 = $53,141
- Inventory for 2014 = $251,800
- Inventory for 2015 = $275,656
- Cash paid for other expenses
Given,
- Other expenses = $132,400
- Prepaid expenses for 2014 = $1,875
- Prepaid expenses for 2015 = $1,250
- Cash paid for income taxes
Now, the total cash payments will be calculated as under −
Now, cash flow from operating activities will be calculated as −
The cash flow from operating activities = $40,900.
- Cash received from sale of equipment = $11,625
- Cash paid for equipment = $30,000 Now, cash used in investing activities will be calculated as −
The cash used in investing activities = ($18,375).
Cash flow from financing activities- Given,
- Cash borrowed on short-term note = $4,000
- Cash paid for long-term note = $50,125
- Cash paid for dividends= $50,100
Now, cash flow from financing activities will be calculated as −
The cash used in financing activities = ($46,225).
Now, we need to calculate net increase/ (decrease in cash)-
Last step is to calculate Ending cash balance-
Given,
- Cash balance for 2014=$73,500
Thus, cash flow statement using direct method has been prepared.
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