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Chapter 14: Q29E (page 781)

Computing cash flow items—direct method Consider the following facts:

  1. Beginning and ending Accounts Receivable are \(24,000 and \)20,000, respectively. Credit sales for the period total \(68,000.
  2. Cost of goods sold is \)77,000.
  3. Beginning Merchandise Inventory balance is \(29,000, and ending Merchandise Inventory balance is \)26,000.
  4. Beginning and ending Accounts Payable are \(12,000 and \)16,000, respectively.

Requirements

  1. Compute cash collections from customers.
  2. Compute cash payments for merchandise inventory

Short Answer

Expert verified

Requirement 1: Cash collection =$72,000

Requirement 2: Cash payment for merchandise inventory =$70,000

Step by step solution

01

Step-by-Step SolutionStep 1: Calculation of cash collections from customer

Cash Collection = Opening account receivable + Credit sales for the period – Closing account receivables

=$24,000+$68,000-$20,000

=$72,000

02

Computation of cash payments for merchandise inventory

Cash Payments for inventory = Cost of goods sold – Beginning merchandise inventory + Closing merchandise inventory + Beginning accounts payable – Closing accounts payable

=$77,000 – 29,000+ $26,000 + 12,000 – $16,000

=$70,000

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Most popular questions from this chapter

Question: Classifying items on the indirect statement of cash flows

The statement of cash flows categorizes like transactions for optimal reporting. Identify each item as a(n):

• Operating activity—addition to net income (O+) or subtraction from net income (O-)

• Investing activity—cash inflow (I+) or cash outflow (I-)

• Financing activity—cash inflow (F+) or cash outflow (F-)

• Non-cash investing and financing activity (NIF)

• Activity that is not used to prepare the indirect statement of cash flows (N)

The indirect method is used to report cash flows from operating activities.

  1. Loss on sale of land.
  2. Acquisition of equipment by issuance of note payable.
  3. Payment of long-term debt.
  4. Acquisition of building by issuance of common stock.
  5. Increase in Salaries Payable.
  6. Decrease in Merchandise Inventory.
  7. Increase in Prepaid Expenses.
  8. Decrease in Accrued Liabilities.
  9. Cash sale of land (no gain or loss).
  10. Issuance of long-term note payable to borrow cash.
  11. Depreciation Expense.
  12. Purchase of treasury stock.
  13. Issuance of common stock.
  14. Increase in Accounts Payable.
  15. Net income.
  16. Payment of cash dividend

Moss Exports is having a bad year. Net income is only \(60,000. Also, two important overseas customers are falling behind in their payments to Moss, and Moss’s accounts receivable are ballooning. The company desperately needs a loan. The Moss Exports Board of Directors is considering ways to put the best face on the company’s financial statements. Moss’s bank closely examines cash flow from operating activities. Daniel Peavey, Moss’s controller, suggests reclassifying the receivables from the slow-paying clients as long-term. He explains to the board that removing the \)80,000 increase in accounts receivable from current assets will increase net cash provided by operations. This approach may help Moss get the loan.

Requirements

  1. Using only the amounts given, compute net cash provided by operations, both without and with the reclassification of the receivables. Which reporting makes Moss look better?
  2. Under what condition would the reclassification of the receivables be ethical? Unethical?

Classic Rare Coins (CRC) was formed on January 1, 2018. Additional data for the year follow:

a. On January 1, 2018, CRC issued no-par common stock for \(525,000.

b. Early in January, CRC made the following cash payments:

1. For store fixtures, \)51,000

2. For merchandise inventory, \(240,000

3. For rent expense on a store building, \)18,000

c. Later in the year, CRC purchased merchandise inventory on account for \(243,000. Before year-end, CRC paid \)153,000 of these accounts payable.

d. During 2018, CRC sold 2,800 units of merchandise inventory for \(325 each. Before year-end, the company collected 95% of this amount. Cost of goods sold for the year was \)290,000, and ending merchandise inventory totaled \(193,000.

e. The store employs three people. The combined annual payroll is \)82,000, of which CRC still owes \(5,000 at year-end.

f. At the end of the year, CRC paid income tax of \)17,000. There were no income taxes payable.

g. Late in 2018, CRC paid cash dividends of $38,000.

h. For store fixtures, CRC uses the straight-line depreciation method, over five years, with zero residual value.

Requirements

1. What is the purpose of the statement of cash flows?

2. Prepare CRC’s income statement for the year ended December 31, 2018. Use the single-step format, with all revenues listed together and all expenses listed together.

3. Prepare CRC’s balance sheet at December 31, 2018.

4. Prepare CRC’s statement of cash flows using the indirect method for the year ended December 31, 2018.

Using a spreadsheet to prepare the statement of cash flows—indirect method Use the Boost Plus, Inc. data in Exercise E14-21 to prepare the spreadsheet for the 2018 statement of cash flows. Format cash flows from operating activities by the indirect method.

Identify each item as operating (O), investing (I), financing (F), or non-cash (N).

1. Cash receipt from the sale of equipment

2. Cash payment for salaries

3. Cash receipt from the collection of long-term notes receivable

4. Purchase of equipment in exchange for notes payable

5. Cash receipt from the issuance of common stock
See all solutions

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