1.
Prepare the operating activities section of the statement of cash flows using the direct method.
1.
Explanation of Solution
Statement of cash flows:
Statement of cash flow is a financial statement that shows the cash and cash equivalents of a company for a particular period of time. It shows the net changes in cash, by reporting the sources and uses of cash as a result of operating, investing, and financing activities of a company.
Direct method-Cash flow statement:
In this method, the information from the operation segment of the company is used for the preparation of cash flow statement instead of using accrual accounting values
Prepare the statement of cash flows of Company O for the year ended December 31, using direct method.
Company O | ||
Statement of Cash Flows (direct Method) | ||
For the year ended December 31 | ||
Particulars | Amount ($) | Amount ($) |
Cash flows from operating activities: | ||
Add: Cash receipts from customers (1) | 22,780 | |
Less: Cash Payments to suppliers (2) | (10,488) | |
Less: Cash Payments for salaries (3) | (4,055) | |
Less: Cash payments for rent (4) | (3,205) | |
Less: Cash payments for insurance (5) | (1,113) | |
Less: Cash payments for utilities | (850) | |
Less: Cash payments for bond interest | (450) | |
Net cash flows from operating activities | $2,595 |
Table (1)
Working Note:
Calculate the cash collection from customers.
Calculate payments made to suppliers:
Calculate payments for salaries:
Calculate payment for rent:
Calculate payments for insurance:
Calculate payments for utilities:
2.
Prepare the operating activities section of the statement of cash flows using the indirect method.
2.
Explanation of Solution
Statement of cash flows:
Statement of cash flow is a financial statement that shows the cash and cash equivalents of a company for a particular period of time. It shows the net changes in cash, by reporting the sources and uses of cash as a result of operating, investing, and financing activities of a company.
Indirect method-Cash flow statement:
Under this method, the following amounts are to be adjusted from the Net Income to calculate the net cash provided from operating activities.
Prepare the statement of cash flows of Company O for the year ended December 31, using indirect method.
Company O | ||
Statement of Cash Flows (Indirect method) | ||
For the year ended December 31 | ||
Particulars | Amount ($) | Amount ($) |
Cash flows from operating activities: | ||
Net loss | (220) | |
Adjustments to reconcile net loss to net cash | ||
provided by operating activities: | ||
Add: Depreciation expense | 2,000 | |
Add: Loss on sale of investments | 650 | |
Add: Decrease in accounts receivable | 180 | |
Less: Increase in merchandise inventory | (85) | |
Add: Increase in accounts payable | 73 | |
Add: Increase in salaries payable | 15 | |
Less: Decrease in rent payable | (6) | |
Add: Decrease in prepaid rent | 1 | |
Less: Increase in prepaid insurance | (13) | |
Total adjustments | 2,815 | |
Net cash provided by operating activities | 2,595 |
Table (2)
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Chapter 12 Solutions
FINANCIAL ACCOUNTING 9TH
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