Chapter 21, Problem 14P

To determine

Prepare the operating activities section under direct method of L Company for the year 2016.

Explanation of Solution

Statement of cash flows: Cash flow statement reports all the cash transactions which are responsible for inflow and outflow of cash, and result of these transactions is reported as ending balance of cash at the end of reported period. Statement of cash flows includes the changes in cash balance due to operating, investing, and financing activities.

Operating Activities: Operating activities include cash inflows and outflows from business operations.

Direct method: Under direct method, cash receipts from customers (cash inflows) and cash payments to suppliers (cash outflows) are reported under the operating activities.

Prepare the operating activities section under direct method:

L Company
Statement of cash flows for the year, 2016
Particulars	Amount($)	Amount($)
Operating Activities:
Cash inflows:
Collection from customers(Working note 1)	40,040
Dividends collected	820
Cash inflows from operating activities		40,860
Cash outflows:
Payments to suppliers(Working note 2)	(19,350)
Payment to employees(Working Note 3)	(11,450)
Other operating payments(Working Note 4)	(1,410)
Payments of income taxes (Working Note 5)	(1,550)
Cash outflows for operating activities		(33,760)
Net cash provided by operating activities		7,100

Table (1)

Working note 1: Calculate the cash collection from customers.

$\begin{array}{c}\text{Cash collection from customers}=\text{}\left\{\begin{array}{l}\text{Sales revenue}\\ \left(\begin{array}{c}+\text{Decrease in accounts receivable}\\ \text{ or }\\ -\text{Increase in accounts receivable}\\ +\text{Increase in deferred revenues}\\ \text{or}\\ -\text{Decrease in deferred revenue}\end{array}\right)\end{array}\right\}\\ =\left(\text{Sales revenue}+\text{ Decrease in accounts receivable}\right)\\ =\$39,930+\$110\\ =\$40,040\end{array}$

Working note 2: Calculate payments made to suppliers.

$\begin{array}{c}\text{Payments}\text{made}\text{to}\text{suppliers}=\left\{\begin{array}{l}\text{Cost of goods sold }+\text{Increase}\text{in}\text{inventory}\\ \text{ or}\\ +\text{Decrease in accounts payable}-\text{Decrease in inventory}\\ \text{ or}\\ -\text{Increase in accounts payable}\end{array}\right\}\\ =\left(\begin{array}{l}\text{Cost of goods sold }\\ -\text{Decrease in inventory}\\ -\text{Increase in accounts payable}\end{array}\right)\\ =\$19,890-\$190-\$350\\ =\$19,350\end{array}$

Working note 3: Calculate the payments to employees.

$\begin{array}{c}\text{Payments to employees=}\left(\begin{array}{l}\text{Wages/ Salaries expenses}\\ \text{+Decrease in wages/ Salaries payable}\\ -\text{Increase in wages/ Salaries payable}\end{array}\right)\\ =\left(\begin{array}{l}\text{Wages/ Salaries expenses}\\ -\text{ Decraese in wages/ Salaries payable}\end{array}\right)\\ =\$11,000-\$\$450\\ =\$11,450\end{array}$

Working note 4: Calculate the other operating payments.

$\begin{array}{c}\text{Other Operating Payments}=\left(\begin{array}{l}\text{Other expenses}\\ +\text{Increase in prepaid items}\\ \text{–Decrease in prepaid items}\\ \text{–Depreciation, depletion}\\ \text{and amortization expenses}\\ \text{–Losses on disposals of assets and liabilities}\\ \text{–Investment loss (equity method)}\end{array}\right)\\ =\left(\begin{array}{l}\text{Other operating expenses }\\ \text{+ increase in prepaid items}\end{array}\right)\\ =\$1,000+\$410\\ =\$1,410\end{array}$

Working note 5: Calculate the income taxes paid.

$\begin{array}{c}\text{Income taxes paid=}\left\{\begin{array}{l}\text{Income tax expenses }\\ \text{+ Decrease in income taxes payable}\\ \text{ or}\\ \text{– Increases in income taxes payable}\\ \text{+ Decrease in deferred tax liability}\\ \text{ or}\\ \text{– Increase in deferred tax liability}\\ \text{+ Increase in deferred tax asset}\\ \text{ or}\\ \text{– Decrease in deferred tax asset}\end{array}\right\}\\ =\left(\begin{array}{l}\text{Income tax expenses }\\ -\text{Increase in income taxes payable}\\ -\text{Increase in deferred tax payable}\end{array}\right)\\ =\$2,050-\$104-396\\ =\$1,550\end{array}$

Conclusion

Therefore, the net cash provided by operating activities is $7,100.

2.

To determine

Prepare the remaining sections in the cash flow statement of L Company for the year 2016.

Explanation of Solution

Prepare the cash flow statement for the year 2016.

L Company
Statement of cash flows for the year, 2016
Particulars	Amount($)	Amount($)
Investing Activities:
Payment for purchase of short-term marketable securities	(1,300)
Proceeds from sale of long-term investment	2,300
Proceeds from sale of equipment	100
Payment for purchase of equipment	(16,200)
Net cash used for investing activities		(15,100)
Financing Activities:
Proceeds from issuance of 12% bonds	9,700
Payment of dividends	(700)
Net cash provided by financing activities		9,000
Net increase in cash(schedule 1)		1,000
Cash, January 1, 2016		1,400
Cash December 31, 2016		2,400
Schedule 1: investing and financing activities not affecting cash
Financing Activities:
Conversion of preferred stock to common stock		(9,000)
Issuance of common stock to convert preferred stock		9,000
Payment of long-term note by issuing common stock		(3,500)
Issuance of common stock to pay long- term note		3,500

Table (1)

Conclusion

Therefore, the net increase in cash is $2,400.