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Chapter 23: Q7E (page 1376)

(Computation of Operating Activities—Direct Method) Presented below are two independent situations.

Situation A: Annie Lennox Co. reports revenues of \(200,000 and operating expenses of \)110,000 in its first year of operations, 2017. Accounts receivable and accounts payable at year-end were \(71,000 and \)29,000, respectively. Assume that the accounts payable related to operating expenses. (Ignore income taxes.)

Instructions

Using the direct method, compute net cash provided by operating activities.

Situation B: The income statement for Blues Traveler Company shows cost of goods sold \(310,000 and operating expenses (exclusive of depreciation) \)230,000. The comparative balance sheet for the year shows that inventory increased \(26,000, prepaid expenses decreased \)8,000, accounts payable (related to merchandise) decreased \(17,000, and accrued expenses payable increased \)11,000.

Instructions

Compute (a) cash payments to suppliers and (b) cash payments for operating expenses.

Short Answer

Expert verified

Situation A: Net cash provided by operating activities is$48,000.

Situation B: Cash payment to the supplier:$353,000

Cash payment for operating expenses:$211,000

Step by step solution

01

Definition of Operating Activities

All the activities that are concerned with daily business operations are known as operating activities. It includes activities such as sales, production, and purchases.

02

Net cash provided by operating activities

Particular

Amount $

Cash receipt of revenue

$129,000

Less: Cash payment of expenses

($81,000)

Net cash provided by operating activities

$48,000

03

Cash payment for suppliers and operating expenses

(a) Cash payment to suppliers:

Particular

Amount $

Cost of goods sold

$310,000

Increase in inventory

$26,000

$336,000

Add: Decrease in account payable

($17,000)

Cash payment to suppliers

$353,000

Cash payment for operating expenses:

Particular

Amount $

Operating expenses

$230,000

Less: decrease in prepaid expenses

($8,000)

Less: Less: Increase in accrued expenses payable

($11,000)

Cash payment for operating expenses

$211,000

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Most popular questions from this chapter

Question: E23-13 (L02,3) (SCF—Direct Method) Brecker Inc., a greeting card company, had the following statements prepared as of December 31, 2017.

BRECKER INC.

COMPARATIVE BALANCE SHEET

AS OF DECEMBER 31, 2017 AND 2016


12/31/17

12/31/16

Cash

\(6,000

\)7,000

Accounts receivable

62,000

51,000

Short-term-debt (available for sale)

35,000

18,000

Inventory

40,000

60,000

Prepaid rent

5,000

4,000

Equipment

154,000

130,000

Accumulated depreciation – Equipment

(35,000)

(25,000)

Copyrights

46,000

50,000

Total assets

\(313,000

\)295,000

Account payable

\(46,000

\)40,000

Income tax payable

4,000

6,000

Salaries and wages payable

8,000

4,000

Short-term loans payable

8,000

10,000

Long-term loans payable

60,000

69,000

Common stock, \(10 par

100,000

100,000

Contributed capital, Common stock

30,000

30,000

Retained earnings

57,000

36,000

Total liability and stockholders equity

\)313,000

\(295,000


BRECKER INC.

INCOME STATEMENT

FOR THE YEAR ENDING DECEMBER 31, 2017

Sales revenue

\)338,150

Cost of goods sold

(175,000)

Gross profit

163,150

Operating expenses

(120,000)

Operating income

43,150

Interest expenses

\(11,400

Gain on sale of equipment

2,000

9,400

Income before taxes

33,750

Income tax expenses

6,750

Net income

\)27,000

Additional information:

1. Dividends in the amount of \(6,000 were declared and paid during 2017.

2. Depreciation expense and amortization expense are included in operating expenses.

3. No unrealized gains or losses have occurred on the investments during the year.

4. Equipment that had a cost of \)20,000 and was 70% depreciated was sold during 2017.

Instructions

Prepare a statement of cash flows using the direct method. (Do not prepare a reconciliation schedule.)

Under IFRS, significant non-cash transactions:

  1. are classified as operating, if they are related to income items.
  2. are excluded from the statement of cash flows and disclosed in a narrative form or summarized in a separate schedule.
  3. are classified as an investing or financing activity.
  4. are classified as an operating activity, unless they can be specifically identified with financing or investing activities.

Novak Corporation is preparing its 2017 statement of cash flows, using the indirect method. Presented below is a list of items that may affect the statement. Using the code below, indicate how each item will affect Novak’s 2017 statement of cash flows.

Code Letter Effect

A Added to net income in the operating section

D Deducted from net income in the operating section

R-I Cash receipt in investing section

P-I Cash payment in investing section

R-F Cash receipt in financing section

P-F Cash payment in financing section

N Noncash investing and financing activity

(a)Purchase of land and building

(b)Decrease in accounts receivable

(c)Issuance of stock.

(d)Depreciation expense.

(e)Sale of land at book value.

(f)Sale of land at a gain.

(g)Payment of dividends.

(h)Increase in accounts receivable.

(i)Purchase of available-for-sale debt investment

(j)Increase in accounts payable.

(k)Decrease in accounts payable.

(l)Loan from bank by signing note

(m)Purchase of equipment using a note

(n)Increase in inventory

(o)Issuance of bonds.

(p)Redemption of bonds payable.

(q)Sale of equipment at a loss.

(r)Purchase of treasury stock.

Question: ETHICS (Cash Flow Reporting)

Brockman Guitar Company is in the business of manufacturing top-quality, steelstring folk guitars. In recent years, the company has experienced working capital problems resulting from the procurement of factory equipment, the unanticipated buildup of receivables and inventories, and the payoff of a balloon mortgage on a new manufacturing facility. The founder and president of the company, Barbara Brockman, has attempted to raise cash from various financial institutions, but to no avail because of the company’s poor performance in recent years. In particular, the company’s lead bank, First Financial, is especially concerned about Brockman’s inability to maintain a positive cash position. The commercial loan officer from First Financial told Barbara, “I can’t even consider your request for capital financing unless I see that your company is able to generate positive cash flows from operations.” Thinking about the banker’s comment, Barbara came up with what she believes is a good plan: With a more attractive statement of cash flows, the bank might be willing to provide long-term financing. To “window dress” cash flows, the company can sell its accounts receivables to factors and liquidate its raw materials inventories. These rather costly transactions would generate lots of cash. As the chief accountant for Brockman Guitar, it is your job to tell Barbara what you think of her plan.

Instructions

Answer the following questions.

(a) What are the ethical issues related to Barbara Brockman’s idea?

(b) What would you tell Barbara Brockman?

What are some of the key obstacles for the FASB and IASB within their accounting guidance in the area of cash flow reporting? Explain.
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