Question

Exercise 17-13 The 2020 accounting records of Blocker Transport reveal these transactions and events. Payment of interest $10,600 Collection of accounts receivable $190,700 Cash sales 49,900 Payment of salaries and wages 56,100 Receipt of dividend revenue 17,100 Depreciation expense 15,000 Payment of income taxes 15,300 Proceeds from sale of vehicles 12,600 Net income 37,900 Purchase of equipment for cash 21,700 Payment of accounts payable Loss on sale of vehicles 3,200 for merchandise 114,400 Payment of dividends 14,600 Payment for land 73,800 Payment of operating expenses 28,700

Prepare the cash flows from operating activities section using the direct method.

Answer 1

Note: (1) In the '2nd last line' question got mixed up or some details are missing. The problematic line is- "Payment of accounts payable Loss on sale of vehicles 3,200 for merchandise 114,400".

  (2) Correct information should have been as follows-

• (A) Payment of Accounts payable for merchandise- 114,400
• (B) Loss on sale of Vehicles- 3,200

OR

• (A) Payment of Accounts payable for merchandise- 3200
• (B) Loss on sale of Vehicles- 114,400

I am solving by considering both scenarios.

SOLUTION : 1 USING DIRECT METHOD

CASH FLOW FROM OPERATING ACTIVITY	AMOUNT ($)	AMOUNT ($)
COLLECTION FROM ACCOUNT RECEIVABLE CASH SALES PAYMENT SALARIES AND WAGES PAYMENT OF OPERATING EXPENSE PAYMENT TO ACCOUNTS PAYABLE PAYMENT OF INCOME TAX NET CASH FLOW FROM OPERATING ACTIVITY	190700 49900 (56100) (28700) (114400) (15300)	26,100

NOTE: PAYMENT OF INTEREST is not taken in Operating Activity as it is a part of Financing Activity. If it has to be considered in operating activity (which some accountants prefers to do) then "Net Cash Flow" would be (26100-10600) = 15500

CASH FLOW FROM OPERATING ACTIVITY	AMOUNT ($)	AMOUNT ($)
COLLECTION FROM ACCOUNT RECEIVABLE CASH SALES PAYMENT SALARIES AND WAGES PAYMENT OF OPERATING EXPENSE PAYMENT TO ACCOUNTS PAYABLE PAYMENT OF INCOME TAX NET CASH FLOW FROM OPERATING ACTIVITY	190700 49900 (56100) (28700) (3200) (15300)	137,300

NOTE: PAYMENT OF INTEREST is not taken in Operating Activity as it is a part of Financing Activity. If it has to be considered in operating activity (which some accountants prefers to do) then "Net Cash Flow" would be (137300-10600) = 126,700

POINT TO BE NOTED-

1) PAYMENT OF INTEREST- is part of financing because DEBT is issued to raise the Capital of the business. Hence it should be in Financing Activity.

2) Dividend Revenue is part of Investing Activity because dividend is received to share holder in lieu of their Capital investment in a business. Here, Blocker Transport has invested some amount in other business.

3) Depreciation is a non-cash item. Hence will not appear in Cash Flow Statement.

4) Sale of vehicles- It is an Investing Activity as a business or firm or an individual sales its Assets in the market, which is not an regular activity or operating activity.

5) Net Income- It isn't a part of Cash Flow Statement.

6) Loss on sale of vehicles- It is an non-cash item. Hence, will not come in cash flow statement. This will appear in Profit/Loss Account or Income Statement.

7) Payment of dividend- Part of Financing Activity. Here, Blocker Transport will pay dividend to its share holders.

8) Payment for land- It is a Investing Activity.

9) Purchase of equipment for cash- It is an Investing Activity of cash flow.