Chapter 21, Problem 18E

To determine

Prepare operating activities section in the cash flow statement under direct method of S Company for the year 2016.

Explanation of Solution

Statement of cash flows: Statement of cash flows 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.

Worksheet: A worksheet is a spreadsheet used while preparing a financial statement. It is a type of form having multiple columns and it is used in the adjustment process. The use of a worksheet is optional for any organization. A worksheet can neither be considered as a journal nor a part of the general ledger.

Prepare operating activities section in the cash flow statement under direct method:

Table (1)

Table (2)

Working Note:

1. (a) Net income for the year ended 2016 is $1,140.
2. (b) Calculate the decrease in accounts receivable.

$\begin{array}{l}\begin{array}{c}\text{Decrease in accounts receivable = }\left(\begin{array}{l}\text{opening accounts receivable}\\ \text{ – closing accounts receivable}\end{array}\right)\\ \text{= \$450- \$310}\\ \text{=\$140}\end{array}\hfill \\ \hfill \end{array}$

1. (c) Calculate an increase in inventory.

   $\begin{array}{c}\text{Increase in inventory = Closing inventory - opening inventory}\\ \text{=\$450-\$310}\\ =\$50\end{array}$

2. (d) Calculate the cost of land sold.

   $\begin{array}{c}\text{Cost of land sold = }\left(\begin{array}{l}\text{Proceeds from sale of land }\\ \text{- Gain on sale of land}\end{array}\right)\\ =\$530-\$400\\ =\$130\end{array}$

3. (e) Calculate the purchase of land.

   Step 1: Calculate the balance amount of land after sale.

   $\begin{array}{c}\begin{array}{l}\text{Balance amount of land }\\ \text{after sales}\end{array})=\left\{\begin{array}{l}\text{Opening balance}\\ -\text{Sale of land}\end{array}\right\}\\ =\$300-\$130\\ =\$170\end{array}$

   Step 2: Calculate the purchase of land.

   $\begin{array}{c}\text{Purchase of land = }\left(\begin{array}{l}\text{Closing balance}\\ -\text{Balance amount of land }\\ \text{after sale}\end{array}\right)\\ =\$500-\$170\\ =\$330\end{array}$

4. (f) Calculate the Proceeds from Equipment.

   $\begin{array}{c}\text{Proceeds from sale of equipment = Book value }-\text{Selling cost}\\ \text{=\$300}-\$260\\ =\$40\end{array}$

5. (g) Calculate the Purchase of equipment.

   Step 1: Calculate the balance amount of equipment after sales.

   $\begin{array}{c}\begin{array}{l}\text{Balance amount of equipment }\\ \text{after sales}\end{array})=\left\{\begin{array}{l}\text{Opening balance}\\ -\text{Sale of equipment}\end{array}\right\}\\ =\$1,600-\$400\\ =\$1,200\end{array}$

   Step 2: Calculate the purchase of equipment.

   $\begin{array}{c}\text{Purchase of Equipment = }\left(\begin{array}{l}\text{Closing balance}\\ -\text{Balance amount of equipment }\\ \text{after sale}\end{array}\right)\\ =\$1,800-\$1,200\\ =\$600\end{array}$

6. (h) Calculate the Depreciation expense.

   $\begin{array}{c}\text{Depreciation Expenses = }\left(\begin{array}{l}\text{Opening accumulated depreciation}\\ -\text{ Closing accumulated depreciation}\end{array}\right)\\ =\$200-\$150\\ =\$50\end{array}$

7. (i) Calculate an increase in accounts payable.

   $\begin{array}{c}\text{Increase in accounts payable = }\left(\begin{array}{l}\text{Closing balance of accounts payable}\\ -\text{Opening balance of accounts payable}\end{array}\right)\\ \text{=\$750}-\$600\\ =\$150\end{array}$

8. (j) Calculate the proceeds from issuance of common stock.

   $\begin{array}{c}\text{Proceeds from issuance of common stock = Number of share}\times \text{Value of share}\\ =50\times \$10\\ =\$500\end{array}$

9. (k) Calculate the payment of dividend.

   Step 1: Calculate the amount of retained earnings.

   $\begin{array}{c}\text{Increase in retained earnings =}\left(\begin{array}{l}\text{Closing retained earning}\\ -\text{ Opening retained earning}\end{array}\right)\\ \text{=\$840}-\$700\\ =\$140\end{array}$

   Step 2: Calculate the amount of dividend paid.

   $\begin{array}{c}\text{Payment of dividend = Net income}-\text{Increase in retained earnings}\\ \text{=\$1,140}-\$140\\ =\$1,000\end{array}$

10. (l) Calculate the net increase in cash.

$\begin{array}{c}\text{Increase in cash =}\left(\begin{array}{l}\text{Closing cash balance}\\ -\text{ Opening cash balance}\end{array}\right)\\ =\$1,130-\$700\\ =\$430\end{array}$

Table (3)

Working note 1:

Calculate the collection from customers.

$\begin{array}{c}\text{Cash collection from customers}=\text{}\left\{\begin{array}{l}\text{Sales revenue}\\ \left(\begin{array}{c}+\text{Decrease in accounts receivable}\\ \text{ or }\\ -\text{Increase in accounts receivable}\\ +\text{Increase in deferred revenues}\\ \text{or}\\ -\text{Decrease in deferred revenue}\end{array}\right)\end{array}\right\}\\ =\left(\text{Sales revenue}+\text{ Decrease in accounts receivable}\right)\\ =\$9,000+\$140\\ =\$9,140\end{array}$

Working note 2:

Calculate the payments to suppliers.

$\begin{array}{c}\text{Payments}\text{made}\text{to}\text{suppliers}=\left\{\begin{array}{l}\text{Cost of goods sold }\\ +\text{Increase}\text{in}\text{inventory}\\ \text{ or}\\ +\text{Decrease in accounts payable}\\ -\text{Decrease in inventory}\\ \text{ or}\\ -\text{Increase in accounts payable}\end{array}\right\}\\ =\left(\begin{array}{l}\text{Cost of goods sold }\\ \text{+ Increase in inventory}\\ -\text{Increase in accounts payable}\end{array}\right)\\ =\$6,000+\$50-\$150\\ =\$5,900\end{array}$

Working note 3:

Calculate the other operating payments.

$\begin{array}{c}\text{Other Operating Payments}=\left(\begin{array}{l}\text{Other expenses}\\ +\text{Increase in prepaid items}\\ \text{-Decrease in prepaid items}\\ \text{-Depreciation,depletion,}\\ \text{and amortization expenses}\\ \text{-Losses on disposals of assets and liabilities}\\ \text{-Investment loss (equity method)}\end{array}\right)\\ =\left(\begin{array}{l}\text{Other operating expenses }\\ -\text{Depreciation expenses}\end{array}\right)\\ =\$2,000-\$50\\ =\$1,950\end{array}$

Accumulated depreciation decreased by $50($200-$150) in total, caused by a $100 decreased due to the sale of equipment with a $400 cost and a $300 book value and a $50 increase due to depreciation expenses.

Conclusion

Therefore, the net cash provided by operating activities is $1,290.