Question

Analyzing Operating Cash Flows (Direct Method)

Lincoln company owns no plant assets and reported the following income statement for the current year:

Sales		$375,000
Cost of goods sold	$235,000
wages expense	55,000
rent expense	21,000
insurance expense	7,500	318,500
net income		$56,500

	End Of Year	Beginning of year
Accounts Receivable	$21,600	$19,600
Inventory	24,000	26,400
Prepaid insurance	3,200	2,800
Accounts payable	8,800	7,200
Wages Payable	3,600	4,400

Calculate the net cash flow from operating activities using the direct method. show a related cash flow for each revenue and expense.

Cash flows from operating activities (Direct Method)

Cash Received from Customers		$ 0
Cash paid for merchandise purchased	$ 0
Cash Paid to Employees	0
Cash Paid to rent	21,0000
Cash Paid for Insurance	0	0
Net Cash Provided by operating Activities		0

Compute its operating cash flow to current liabilities (OCFCL) ratio. (Assume current liabilities consist of accounts payable and wages payable.)

Round answer to two decimal places.

Answer 1

Cash received from customers = Beginning accounts receivable + Sales - Ending accounts receivable
Cash received from customers = $19,600 + $375,000 - $21,600
Cash received from customers = $373,000

Cost of goods purchased = Ending inventory + Cost of goods sold - Beginning inventory
Cost of goods purchased = $24,000 + $235,000 - $26,400
Cost of goods purchased = $232,600

Cash paid for merchandise purchased = Beginning accounts payable + Cost of goods purchased - Ending accounts payable
Cash paid for merchandise purchased = $7,200 + $232,600 - $8,800
Cash paid for merchandise purchased = $231,000

Cash paid to employees = Beginning wages payable + Wages expense - Ending wages payable
Cash paid to employees = $4,400 + $55,000 - $3,600
Cash paid to employees = $55,800

Cash paid to rent = Rent expense
Cash paid to rent = $21,000

Cash paid for insurance = Ending prepaid insurance + Insurance expense - Beginning prepaid insurance
Cash paid for insurance = $3,200 + $7,500 - $2,800
Cash paid for insurance = $7,900

Average current liabilities = (Beginning accounts payable + Beginning wages payable + Ending accounts payable + Ending wages payable) / 2
Average current liabilities = ($7,200 + $4,400 + $8,800 + $3,600) / 2
Average current liabilities = $12,000

Operating cash flow to current liabilities = Net cash provided by operating activities / Average current liabilities
Operating cash flow to current liabilities = $57,300 / $12,000
Operating cash flow to current liabilities = 4.78