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Problems Lecture Statement of Cash Flows

The document explains the direct method for calculating cash flow from operating activities, detailing the necessary cash receipts and payments involved. It provides formulas for cash inflows and outflows, along with an example calculation using specific data from a company's accounts. The final result shows the net cash flow from operating activities based on the provided figures.

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2 views

Problems Lecture Statement of Cash Flows

The document explains the direct method for calculating cash flow from operating activities, detailing the necessary cash receipts and payments involved. It provides formulas for cash inflows and outflows, along with an example calculation using specific data from a company's accounts. The final result shows the net cash flow from operating activities based on the provided figures.

Uploaded by

krcc.work
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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LECTURE –

STATEMENT OF CASH FLOWS

AL F. BERBANO

DIRECT METHOD
OPERATING ACTIVITIES

The direct method to calculate cash flow from operating activities involves determination
of various types of cash receipts and payments such as cash receipts from customers,
cash paid to suppliers, cash paid for salaries, etc. and then putting them together under
the cash flow from operating section of cash flow statement. These figures are
calculated using the beginning and ending balances of various accounts of the business
and the net increase or decrease in the account. The exact formulas to calculate
various cash inflows and outflows vary. The most important ones are given below:

Cash Receipts from Customers =


+ Net Sales
+ Beginning Accounts Receivable
− Ending Accounts Receivable
Cash Payments to Suppliers =
+ Purchases
+ Ending Inventory
− Beginning Inventory
+ Beginning Accounts Payable
− Ending Accounts Payable
Cash Payments to Employees =
+ Beginning Salaries Payable
− Ending Salaries Payable
+ Salaries Expense
Cash Payments for Purchase of Prepaid Assets =
+ Ending Prepaid Rent, Prepaid Insurance etc.
+ Expired Rent, Expired Insurance etc.
− Beginning Prepaid Rent, Prepaid Insurance etc.
Interest Payments =
+ Beginning Interest Payable
− Ending Interest Payable
+ Interest Expense
Income Tax Payments =
+ Beginning Income Tax Payable
− Ending Income Tax Payable
Income Tax Expense
+
In the formulas given above it is assumed that accounts receivable are only used for
credit sales. It is also assumed that all sales are on credit. If there are cash sales as
well, then receipts from cash sales must be included in the cash receipts from
customers to obtain a correct figure of cash flow from operating activities.

Similarly, it is assumed that accounts payable are used merely for purchases on
account and that all purchases are on credit. If there are cash purchases as well,
then cash payments for them must be included in the cash paid to suppliers. It is
important to note that here may be receipts & payments other than those discussed
above.

Once all the cash inflows and outflows from operating activities are calculated, they are
added in the operating section of cash flows to obtain the net cash flows from operating
activities.

The following example shows the format and calculation of cash flows from operating
activities using direct method.

Example

Prepare the cash flows from operating activities section of cash flow statement by direct
method using the following information:

December 31 2011 2010


Accounts Receivable $34,130 $28,410
Prepaid Rent 20,000 25,000
Prepaid Insurance 6,800 6,000
Inventory 23,030 15,450
Accounts Payable 14,590 31,300
Salaries Payable 8,310 5,120
Interest Payable 700 360
Income Tax Payable 2,340 0
Year Ended December
2011
31
Net Sales 64,970
Salaries Expense 8,610
Rent Expense 5,000
Insurance Expense 3,200
Interest Expense 1,650
Solution:

Cash Flow from Operating Activities:


Cash Receipts
From Customers (1) $59,250
Cash Payments
To Suppliers (2) −24,290
To Employees (3) −5,420
For Purchase of Prepaid Assets (4) −4,000
Interest (5) −1,310
Income Tax (6) −0
Net Cash Flow from Operating
24,230
Activities

Working Notes (Computations):

1) 64,970 + 28,410 - 34,130


2) 23,030 - 15,450 + 31,300 - 14,590
3) 5,120 - 8,310 + 8,610
4) 20,000 + 6,800 + 5,000 + 3,200 - 25,000 -
6,000
5) 360 - 700 + 1,650
6) 0 - 2,340 + 2,340

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