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Chapter 14: Q27E (page 776)

Question: Preparing operating activities cash flow—direct method

The accounting records of Four Seasons Parts reveal the following:

Payment of salaries and wages \( 34,000

Net income \) 21,000

Depreciation expense 10,000

Payment of income tax 16,000

Payment of interest 17,000

Collection of dividend revenue 5,000

Payment of dividends 5,000

Payment to suppliers 51,000

Collections from customers 116,000

Compute cash flows from operating activities using the direct method for the year ended December 31, 2018.

Short Answer

Expert verified

Answer

Net cash provided by operating activities is $3,000.

Step by step solution

01

Cash flow from operating activities

Cash flows from operating activities

Receipts:

Collection from customers

$116,000

Collection of dividend revenue

$5,000

Payments:

To suppliers

($51,000)

To employees

($34,000)

For income tax

($16,000)

For Interest

($17,000)

Net cash provided by operating activities

$3,000

02

Treatment of net income

Net income is used while preparing cash flow statement by indirect method.

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Most popular questions from this chapter

Boundary Rare Coins (BRC) was formed on January 1, 2018. Additional data for the year follow:

  1. On January 1, 2018, BRC issued no-par common stock for \(475,000.
  2. Early in January, BRC made the following cash payments:For store fixtures, \)53,000;For merchandise inventory, \(260,000;For rent expense on the store building, \)13,000
  3. Later in the year, BRC purchased merchandise inventory on account for \(240,000. Before year-end, BRC paid \)160,000 of these accounts payable.
  4. During 2018, BRC sold 2,200 units of merchandise inventory for \(450 each. Before year-end, the company collected 85% of this amount. Cost of goods sold for the year was \)330,000, and ending merchandise inventory totaled \(170,000.
  5. The store employs three people. The combined annual payroll is \)80,000, of which BRC still owes \(4,000 at year-end.
  6. At the end of the year, BRC paid income tax of \)24,000. There are no income taxes payable.
  7. Late in 2018, BRC paid cash dividends of $40,000.
  8. For store fixtures, BRC uses the straight-line depreciation method, over five years, with zero residual value.

Requirements

  1. Prepare BRC’s income statement for the year ended December 31, 2018. Use the single-step format, with all revenues listed together and all expenses listed together.
  2. Prepare BRC’s balance sheet at December 31, 2018.
  3. Prepare BRC’s statement of cash flows for the year ended December 31, 2018. Format cash flows from operating activities by the direct method.

Computing operating activities cash flow—indirect method

The records of Vintage Color Engraving reveal the following:

Net income \( 36,000

Depreciation expense \) 5,000

Sales revenue 53,000

Decrease in current liabilities 19,000

Loss on sale of land 4,000

Increase in current assets other than cash 10,000

Acquisition of land 35,000

Compute cash flows from operating activities by the indirect method for year ended December 31, 2018.

Question: Classifying items on the indirect statement of cash flows

The statement of cash flows categorizes like transactions for optimal reporting. Identify each item as a(n):

• Operating activity—addition to net income (O+) or subtraction from net income (O-)

• Investing activity—cash inflow (I+) or cash outflow (I-)

• Financing activity—cash inflow (F+) or cash outflow (F-)

• Non-cash investing and financing activity (NIF)

• Activity that is not used to prepare the indirect statement of cash flows (N)

The indirect method is used to report cash flows from operating activities.

  1. Loss on sale of land.
  2. Acquisition of equipment by issuance of note payable.
  3. Payment of long-term debt.
  4. Acquisition of building by issuance of common stock.
  5. Increase in Salaries Payable.
  6. Decrease in Merchandise Inventory.
  7. Increase in Prepaid Expenses.
  8. Decrease in Accrued Liabilities.
  9. Cash sale of land (no gain or loss).
  10. Issuance of long-term note payable to borrow cash.
  11. Depreciation Expense.
  12. Purchase of treasury stock.
  13. Issuance of common stock.
  14. Increase in Accounts Payable.
  15. Net income.
  16. Payment of cash dividend

Using a spreadsheet to complete the statement of cash flows— indirect method

Companies can use a spreadsheet to complete the statement of cash flows. Each item that follows is recorded in the transaction analysis columns of the spreadsheet.

  1. Net income
  2. Increases in current assets (other than Cash)
  3. Decreases in current liabilities
  4. Cash payment for acquisition of plant assets
  5. Cash receipt from issuance of common stock
  6. Depreciation expense

Identify each as being recorded by a Debit or Credit in the statement of cash flows section of the spreadsheet

Question: Muench, Inc.’s accountant has partially completed the spreadsheet for the statement of cash flows. Fill in the remaining missing information.
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