Ending
Beginning
balance
balance
Accounts receivable
$32,000
$40,000
Inventory
60,000
50,000
Prepaid expenses
12,000
8,000
Accumulated depreciation
(40,000)
(30,000)
Accounts payable
30,000
45,000
Accrued liabilities
16,000
10,000
Income taxes payable
2,000
5,000
Required: Using the direct method, prepare the operating activities section of the statement of cash
flows.
18. Gingerich Company’s comparative balance sheet and income statement for last year appear below:
Balance Sheet
Ending
Beginning
Balance
Balance
Cash
$ 45,000
$ 27,000
Accounts receivable
39,000
30,000
Inventory
30,000
44,000
Prepaid expenses
14,000
19,000
Long-term investments
280,000
200,000
Plant and equipment
600,000
600,000
Accumulated depreciation
(322,000)
(291,000)
Sales revenue
Adjustments to a cash basis:
Decrease in accounts receivable
+ 8,000
Adjustments to a cash basis:
Increase in inventory
Decrease in accounts payable
Operating expenses
60,000
Adjustments to a cash basis:
Increase in prepaid expenses
+ 4,000
Income tax expense
16,000
Adjustments to a cash basis:
Decrease in income taxes payable
+ 3,000
Net cash flows from operating activities
Total assets
$686,000
$629,000
Accounts payable
$ 19,000
$ 34,000
Accrued liabilities
37,000
25,000
Taxes payable
32,000
14,000
Deferred taxes payable
28,000
22,000
Bonds payable
100,000
150,000
Common stock
100,000
70,000
Retained earnings
370,000
314,000
Total liabilities and stockholders’ equity
$686,000
$629,000
Income Statement
Sales
$800,000
Less: Cost of goods sold
430,000
Gross margin
370,000
Less: Operating expenses
230,000
Net operating income
140,000
Less: Income taxes
42,000
Net income
$ 98,000
The company declared and paid $42,000 in cash dividends during the year.
Required: Using the direct method, prepare each of the following activities sections of the company’s
statement of cash flows for the year:
A.
Operating activities section.
B.
Investing activities section.
C.
Financing activities section.
Sales
$800,000
Adjustments to a cash basis:
Cost of goods sold
430,000
Adjustments to a cash basis:
Decrease in accounts payable
Operating expenses
230,000
Adjustments to a cash basis:
Income tax expense
42,000
Adjustments to a cash basis:
Net cash flows from operating activities
$160,000
19. The following information is available for Snider Company:
Receipts from customers
$180,000
Dividends from stock investments
3,000
Proceeds from sale of equipment
18,000
Proceeds from issuance of stock
90,000
Payments for goods
100,000
Payments for operating expenses
70,000
Interest paid
5,000
Taxes paid
4,000
Dividends paid
20,000
Required: Based on the preceding information, compute the net cash provided by operating activities.
Receipts from customers
$180,000
Dividends from stock investments
183,000
Payments for goods
$100,000
Payments for operating expenses
70,000
Interest paid
5,000
Taxes paid
Net cash provided by operating activities
20. Dolan Company’s income statement showed revenues of $250,000 and operating expenses of
$160,000. Accounts receivable decreased by $60,000 and accounts payable increased by $40,000
during the year.
Required: Compute (A) cash receipts from customers and (B) cash payments for operating expenses
using the direct method.
Increase in long-term investments
Net cash flows from investing activities
Decrease in bonds payable
Increase in common stock
30,000
Cash dividends
Net cash flows from financing activities
21. The general ledger of Lopez Company provides the following information:
Beginning
End of Year
of Year
Accounts Receivable
$ 55,000
$ 94,000
Inventory
350,000
210,000
Accounts Payable
40,000
65,000
Net sales for the year were $2,100,000 and cost of goods sold were $1,500,000.
Required: Compute the following:
A.
Cash receipts from customers.
B.
Cash payments to suppliers.
A.
Cash receipts from customers
Sales + Decrease in Accounts Receivable
$2,100,000 + $39,000 = $2,139,000
First calculate the amount of purchases:
Beginning inventory
Add:
Purchases
?
Less:
Ending inventory
Cost of goods sold
$1,500,000
= $1,640,000
Amount of cash payments to
suppliers
Purchases + Decrease in accounts payable
$1,640,000 + $25,000 = $1,665,000
22. The income statement of Stuart Company is shown below:
STUART COMPANY
Income Statement
Cash receipts from customers = $310,000 ($250,000 + $60,000)
Cash payments for operating expenses = $120,000 ($160,000 − $40,000)
For the Year Ended December 31, 2013
Sales
$8,200,000
Cost of goods sold
5,400,000
Gross profit
2,800,000
Operating expenses
Selling expenses
$500,000
Administrative expense
700,000
Depreciation expense
90,000
Amortization expense
30,000
1,320,000
Net income
$1,480,000
Additional information:
1.
Accounts receivable increased $400,000 during the year.
2.
Inventory increased $250,000 during the year.
3.
Prepaid expenses increased $200,000 during the year.
4.
Accounts payable to merchandise suppliers increased $100,000 during the year.
5.
Accrued expenses payable increased $180,000 during the year.
Required: Prepare the operating activities section of the statement of cash flows for the year ended
December 31, 2013, for Stuart Company, using the direct method.
For the Year Ended December 31, 2013
Cash flows from operating activities
Adjustments to Cash Basis:
Sales
Cost of Goods Sold
Operating expenses
Net cash provided by operations
(1)
Sales
Deduct: Increase in accounts receivable
(2)
Cost of goods sold
Add: Increase in inventory
250,000
Deduct: Increase in accounts payable
(3)
Operating expenses exclusive of depreciation and amortization
Add: Increase in prepaid expenses
200,000
Deduct: Increase in accrued expenses payable
23. The income statement of Bingham Inc. for the year ended December 31, 2013, reported the following
condensed information:
Service revenue
$600,000
Operating expenses
360,000
Income from operations
240,000
Income tax expense
60,000
Net income
$180,000
Bingham’s balance sheet contained the following comparative data at December 31:
2013
2012
Accounts receivable
$50,000
$40,000
Accounts payable
35,000
50,000
Income taxes payable
6,000
3,000
Bingham has no depreciable assets. Accounts payable pertains to operating expenses.
Require: Prepare the operating activities section of the statement of cash flows using the direct
method.
24. The income statement of Grimes Company is shown below:
GRIMES COMPANY
Income Statement
For the Year Ended December 31, 2013
Sales
$8,000,000
Cost of goods sold
5,400,000
Gross profit
2,600,000
Operating expenses
Selling expenses
$500,000
Administrative expense
700,000
Depreciation expense
90,000
Amortization expense
30,000
(1,320,000)
Net income
$1,280,000
For the Year Ended December 31, 2013
Cash flows from operating activities
Cash receipts from customers ($600,000 − $10,000)
Cash payments:
For operating expenses ($360,000 + $15,000)
$375,000
For income taxes ($60,000 − $3,000)
Net cash provided by operating activities
$158,000
Additional information:
1.
Accounts receivable increased $500,000 during the year.
2.
Inventory increased $250,000 during the year.
3.
Prepaid expenses increased $200,000 during the year.
4.
Accounts payable to merchandise suppliers increased $150,000 during the year.
5.
Accrued expenses payable increased $180,000 during the year.
Required: Prepare the operating activities section of the statement of cash flows for the year ended
December 31, 2013, for Grimes Company, using the direct method.
25. Clover Company had the following information for the years 2014 and 2013:
Clover Company
Income Statement
For the Year Ended December 31, 2014
Sales
$4,200,000
Cost of goods sold
$2,150,000
Cash flows from operating activities
Cash receipts from customers
(1)
Cash payments:
To suppliers
(2)
For operating expenses
(3)
Net cash provided by operations
(1)
Sales
(500,000)
Cash receipts from customers
(2)
Cost of goods sold
Add: Increase in inventory
Purchases
Deduct: Increase in accounts payable
Cash payments to suppliers
(3)
Operating expenses exclusive of depreciation and amortization
Add: Increase in prepaid expenses
Deduct: Increase in accrued expenses payable
Cash payments for operating expenses
Gross profit
$2,050,000
Operating expense:
Selling expense
$580,000
Administrative expense
$440,000
Depreciation expense
$40,000
$1,060,000
Net income
$990,000
Clover Company
Balance Sheet
December 31, 2014
2014
2013
Assets
Cash
$16,000
$22,000
Accounts receivable
$325,000
$412,000
Inventory
$127,000
$205,000
Property, plant and equipment
$300,000
$300,000
Accumulated depreciation
$120,000
$100,000
Total assets
$888,000
$1,039,000
Liabilities
Accounts payable
$46,000
$59,000
Accrued expenses
$65,000
$42,000
Stockholders’ equity
$777,000
$938,000
Total liabilities and equity
$888,000
$1,039,000
Required: Prepare the operating activities section of the statement of cash flows using the direct
method.
Cash flows from operating activities
26. Best Wishes Company had the following information for the year ended December 31, 2011:
Best Wishes Company
Income Statement
For the Year Ended December 31, 2013
Sales
$470,000
Cost of goods sold
254,000
Gross profit
216,000
Operating expenses
Selling expense
110,000
Administrative expense
73,000
Cash payments:
Cash flows from operating activities:
Income Statement
Adjustments
Cash Flows
Cost of goods sold
Net Operating cash
a. Decrease in accounts receivable
b. Decrease in inventory
c. Decrease in accounts payable
d. Increase in accrued expenses
Amortization expense
14,000
197,000
Net income
$19,000
Additional information:
a. Accounts receivable increased by $12,000.
b. Inventories increased by $28,000.
c. Prepaid expenses increased by $1,200.
d. Accounts payable to merchandise suppliers increased by $19,000.
e. Accrued expenses payable increased by $9,000.
Required: Prepare the operating activities section of the statement of cash flows for the year
ended December 31, 2013, for Best Wishes Company, using the direct method.
Cash flows from operating activities:
Cash payments:
To suppliers
For operating expenses
Net operating cash flows
Cash receipts from customers
Cost of goods sold
Deduct: Increase in accounts payable
Cash payments to suppliers
Add: Increase in prepaid expenses
Deduct: Increase in accrued expenses payable
ESSAY
1. The statement of cash flow classifies the cash flows into three categories. Describe each of these
categories.
2. When preparing a statement of cash flows using the indirect method, why is depreciation added back
to net income within the operating activities section?
3. How is it possible for a company to suffer a net loss for a given year, yet produce a positive net cash
flow from operating activities?
4. If an asset is sold at a gain, why is the gain deducted from net income when computing the net cash
flows from operating activities under the indirect method?
5. There are five basic steps that are followed in preparing a statement of cash flows. List the five steps
and briefly describe what takes place in each step.
6. Cash flows from operating activities can be calculated using the indirect or direct method. Briefly
describe how the two methods differ yet arrive at the same information about the net cash flows from
operating activities.
