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Krauss Company’s income statement for the year ended December 31, 2017, contained the following condensed information.

Service revenue \(840,000

Operating expenses (excluding depreciation) \)624,000

Depreciation expense 60,000

Loss on sale of equipment 26,000 710,000

Income before income taxes 130,000

Income tax expense 40,000

Net income \( 90,000

Krauss’s balance sheet contained the following comparative data at December 31.

2017 2016

Accounts receivable \)37,000 $54,000

Accounts payable 41,000 31,000

Income taxes payable 4,000 8,500

(Accounts payable pertains to operating expenses.)

Instructions Prepare the operating activities section of the statement of cash flows using the direct method.

Short Answer

Expert verified

The net cash provided by operating activities is computed as $198,500

Step by step solution

01

Computation of cash receipts from customers

Cashreceiptsfromcustomers=ServiceRevenue+Decreaseinaccountsreceivables=840,000-(54,000-37,000)=$857,000

02

Computation of cash payment to suppliers

Cashpaymentforoperatingexpenses=Operatingexpensesperincomestatement-Increaseinaccountspayable=624,000-(41,000-31,000)=$614,000

03

Computation of cash payment for operating expenses

Cashpaymentforincometaxes=Incometaxexpenseperincomestatement+Decreaseinincometaxespayable=40,000+(8,500-4,000)=$44,500

04

Preparation statement of cash flow (partial)

KRAUSS COMPANY
Partial Statement of Cash Flows
For the year ended December 31, 2017

Particulars

Amount ($)

Amount ($)

Cash flows from operating activities

$857,000

Cash Receipts from customers

Cash Payments:

For Operating expenses

$614,000

For Income Taxes

44,500

658,500

Net cash provided by operating activities

$198,500

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Most popular questions from this chapter

Unlike the other major financial statements, the statement of cash flows is not prepared from the adjusted trial balance. From what sources does the information to prepare this statement come, and what information does each source provide?

Founded in the early 1980s, the Vermont Teddy Bear Co. designs and manufactures American-made teddy bears and markets them primarily as gifts called Bear-Grams or Teddy Bear-Grams. Bear-Grams are personalized teddy bears delivered directly to the recipient for special occasions such as birthdays and anniversaries. The Shelburne, Vermont, company’s primary markets are New York, Boston, and Chicago. Sales have jumped dramatically in recent years. Such dramatic growth has significant implications for cash flows. Provided below are the cash flow statements for two recent years for the company.

Current Year

Prior Year

Cash flows from operating activities:

Net income

\( 17,523

\) 838,955

Adjustments to reconcile net income to net cash provided by operating activities

Deferred income taxes

(69,524)

(146,590)

Depreciation and amortization

316,416

181,348

Changes in assets and liabilities:

Accounts receivable, trade

(38,267)

(25,947)

Inventories

(1,599,014)

(1,289,293)

Prepaid and other current assets

(444,794)

(113,205)

Deposits and other assets

(24,240)

(83,044)

Accounts payable

2,017,059

(284,567)

Accrued expenses

61,321

170,755

Accrued interest payable, debentures

-

(58,219)

Other

-

(8,960)

Income taxes payable

-

117,810

Net cash provided by (used for) operating activities

236,480

(700,957)

Net cash used for investing activities

(2,102,892)

(4,422,953)

Net cash (used for) provided by financing activities

(315,353)

9,685,435

Net change in cash and cash equivalents

(2,181,765)

4,561,525

Other information:

Current liabilities

\( 4,055,465

\) 1,995,600

Total liabilities

4,620,085

2,184,386

Net sales

20,560,566

17,025,856

Instructions

  1. Note that net income in the current year was only 17,523comparedtoprioryearincomeof838,955, but net cash flow from operating activities was 236,480inthecurrentyearandanegative700,957 in the prior year. Explain the causes of this apparent paradox.
  2. Evaluate Vermont Teddy Bear’s liquidity, solvency, and profitability for the current year using cash flow-based ratios.

Question: The Procter & Gamble Company (P&G)

The financial statements of P&G are presented in Appendix B. The company’s complete annual report, including the notes to the financial statements, is available online.

Instructions

Refer to P&G’s financial statements and the accompanying notes to answer the following questions.

(a) Which method of computing net cash provided by operating activities does P&G use? What were the amounts of net cash provided by operating activities for the years 2012, 2013, and 2014? Which two items were most responsible for the decrease in net cash provided by operating activities in 2014?

(b) What was the most significant item in the cash flows used for investing activities section in 2014?

What was the most significant item in the cash flows used for financing activities section in 2014?

(c) Where is “deferred income taxes” reported in P&G’s statement of cash flows? Why does it appear in that section of the statement of cash flows?

(d) Where is depreciation reported in P&G’s statement of cash flows? Why is depreciation added to net income in the statement of cash flows?

At January 1, 2017, Eikenberry Inc. had accounts receivable of 72,000.AtDecember31,2017,accountsreceivableis54,000. Sales revenue for 2017 total $420,000. Compute Eikenberry’s 2017 cash receipts from customers.

For purposes of the statement of cash flows, under IFRS, income taxes paid are treated as:

  1. cash flows from operating activities unless they can be separately identified as part of investing or financing activities.
  2. an operating activity in all cases.
  3. an investing or operating activity, depending on whether a refund is received.
  4. either operating, financing, or investing activity, but treated consistently to other companies in the same industry.
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